Talking in his London office to Bloomberg, US economist and Bank of England (BoE) policy maker Dr Adam Posen said that the lack of credit for first time buyers and the 'very low' levels of property transactions posed a 'downside risk' to the UK housing market.
He went on to tell Bloomberg that two things have held the UK property market together. The first is a combination of low interest rates and the Quantitative Easing (QE) programme and the second being that UK home building levels are 'relatively small for the size of the economy compared to Spain or Ireland or the U.S.'
Dr Posen is one member of the BoE Monetary Policy Committee (MPC), if not the only one, who sees the way ahead for the recovery as more low interest rates and more QE.
Just as net lending is falling however, mortgage lenders like Halifax are pulling their best fixed rates in the anticipation of rate rises later in the year. So it seems that the lenders don't think that Dr Posen's view is going to win the rest of the MPC over. This move will put borrowers under pressure to review their circumstances and decide whether they want to fix that tracker (if they can) or come off of their lender's standard variable rate. Be in no doubt though that the lenders will replace their best fixed rates very quickly as the risk of a rate rise increases.
With the BoE rate currently at 0.5% and 3 month LIBOR (London Inter-Bank Offered Rate) at only 0.77563% on Friday the banks are doing very nicely with mortgage rates at about 2-4% thank you very much.
What worries me though is that Dr Posen puts current credit and building levels as a downside risk (the likelihood that a security or other investment will decline in price, or the amount of loss that could result from that potential decline).
The real 'downside risk' was brought about as follows:
- Take a perfectly functioning housing market
- Pump as much money as you can into it
- Get as many people involved as you can
- Each of whom puts as much money as they can afford into it
- Watch as prices increase beyond any semblance of sensible affordability levels
- Do nothing to stop it
- Encourage totally irresponsible mortgage lending
- Regulate nothing properly
The current low levels of credit availability and home sales is a direct consequence of the above. They are part of the inevitable price correction mechanism.