The Crunch Goes Wider Than Credit

The downward pressure on house prices is a simple market reaction to fewer buyers who are willing to pay the asking price and have enough funds to do so. The National Association of Estate Agents reports that the number of house buyers on agents’ books dropped in February to the lowest yet recorded, from an average of 276 per agent in January to 243. The number of properties for sale fell from 83 to 74 per agent over the same period.

There are three main groups who cannot wait out the present situation:

• Borrowers who have used the previous market value of the house to secure debts and where the lender is now calling either for repayment or further security;
• First time buyers now denied sufficient mortgage finance to purchase and unable to find suitable alternative rented accommodation;
• Sellers already in the process of moving home where the gap between the sale price and the buying price has widened due to different market conditions in each case.

For other groups, while present circumstances surrounding mortgages are an inconvenience, the delay and frustration involved are relatively small consequences.

Some characterise the credit crunch as the result of a series of market failures. On the contrary, the markets have worked as markets do. Through a combination of greed and incompetence some banks fell down on the job. The crunch occurred as a result of the parcelling up of mortgages into tradable securities. Now nobody wants to buy something that has little worth and banks are increasingly reluctant to lend to each other. It sounds like a typical market to me.

More serious is the indirect outfall. This takes the form of lost jobs and, in some cases, the wholesale closure of firms. Jobs and firms affected include planners, surveyors, gravel and cement works, brick makers, the transport industry, builders and the building trade, estate agents, solicitors, removers, domestic furnishers and appliance makers – even the Post Office, the Land Registry and the local Councils that need less people to deal with change of addresses.

As workers fall out of employment the tax-take drops and the social security bill grows. As firms go out of business the bad debts of their supplies and lenders increase. It takes very little to trigger a domino effect throughout the sector and associated providers.

Signs that this process may have already started are coming from the USA. 153,000 redundancies were declared across the US financial services industry in 2007, more than half of them relating to mortgages. In the next 12 to 18 months American commercial banks are expected to cut a further 200,000 US jobs to reduce costs. Those job cuts will be in operational and support departments among modestly paid people.

Meanwhile, those heading the institutions are out of their depth. The US banking industry has not experienced a reduction in revenue for 40 years. In 2008, it looks like it will decrease for the first time in the working lives of those in charge. They have no practical hands-on knowledge of how to handle it. We can expect more costly mistakes as they learn at everyone else’s expense.

The call now is for governments to “fix” the problem. In an interim report in February to the G7 the Financial Stability Forum said, “Events have shown that the quality of risk management varied significantly among the largest and apparently most sophisticated market participants.” What comfort can we take as governments now begin to meddle – the self-same governments that failed to notice and regulate the dangerous free-for-all in the first place? It is not sophistication we seek; it is plain commonsense.

The last Conservative government was rightly excoriated for devastating the manufacturing base of this country. We have yet to see the worst that this Labour government can do to rival that. When help and hemlock are offered by the same hand any hesitation is wholly understandable.