Tuesday, April 21, 2009

The return of banking monopolies

There is an mass of desperate housing speculators out there restlessly waiting for the housing market to bottom out. Over the last couple of weeks, an assortment of newspapers and industry groups has been feeding the hope that the catastrophic collapse of house prices has stopped. The RCIS recently published some data showing that buyer interest, that most nebulous of housing market data, has been ticking upwards. Likewise, Rightmove claims that seller asking prices are beginning to rise again.

So has the housing market begun to trace out a turning point? Housing inflation, which is after all what all property speculators want to see, depends on one thing - credit. If homebuyers cannot borrow, they cannot buy overpriced houses. The housing market collapse was driven by declining mortgage lending; the market will not recover until lending increases. It is simple and as complicated as that.

Recent mortgage approvals seem to have stabilized. In a typical month, UK banks are now approving a little less than 40,000 mortgages. During the bubble years, the number was around 120,000. Crudely speaking, mortgage lending is down by about two thirds. That number is going to have to pick up considerably if we are to see recovery in house prices.

Are we likely to see lending picked up any time soon? A recovery will require the return of non high street lenders to the market. Mortgage approvals from major UK high street banks haven't really fallen by that much. It is the little banks that have scampered off.

I suspect that the mortgage market has fundamentally changed. The banking crisis has squeezed out marginal players, and reduced effective competition. The government aided and abetted this increased monopolization of the market by designing their bail out interventions to favour the larger systematically important banks.

With competition now reduced, high street banks have an incentive to reduce supply permanently, in order to maintain large interest-rate spreads. It won’t be so easy to return to the bubbly years that preceded August 2007.

(A quick word about the chart; some readers may ask how total lending can be below lending of major UK banks. The major UK lenders series covers gross lending approvals. The total lending series includes net cancellations, and therefore can fall below gross approvals data.)


  1. Yet another reason why the bank bailouts were a much worse idea than bank administration.

  2. Dont worry, Tescos is about to elbow their way in.

  3. A young hospital nurse was telling me today that she and her partner has enquired about a mortgage for a property they'd seen and had been told that they'd need a deposit of £30000. She said that that would take them years "or tens of years" to save. Really, she said, you'd need to inherit some money. I didn't add my tuppence worth, but I suppose that once a bottom is reached the companies might relax their LTV requirements. Or is that nearly tautological?

  4. I see the failure to extend bank lending as connected to the continuing risk of failure of the interbank market.
    How do we really pay for our imports? We sell debt, or we sell bundled up mortgage agreements for foreign exchange, and then get the goods.
    At the moment our imports are down, although we are running a deficit. Usually when the interbank market is mentioned in the news you imagine we are talking about the -UK- interbank market. Of course not. We exchange with foreign banks for trades in the same way that we do internally.
    Currently our exported debt is guaranteed by the government. The banks pay for this guarantee a little but the risks associated with UK banks have changed into sovereign risk instead.
    Should mortgage lending resume, and house prices recover, the "wealth" that would generate would flow overseas as imports increased (as is our usual style). However, for the foreign banks on the other end of the trade all they would see is a much larger sovereign risk and from that we might be in the situation of the interbank market freezing up again, this time the market between UK and external banks.
    This is an end game scenario because of currency collapse.
    My point being that this is not some game being played out solely within the UK. Foreign banks are continually asked to accept nothing more than an IOU they don't want. The UK banks don't wish to be in the position of being forced sellers.
    The foreign banks have no reason to draw any distinction between government debt and private debt, as they may be totalled in terms of our external ability to pay. Measures announced by the UK government are of no interest to them.
    UK banks therefore face nothing but losses by the devaluation of debt through further issuance, whether through additional guarantee payments to the UK government, lower value through oversupply, lower value through increased risk of default.
    As has already been pointed out, the UK is heavily in debt and so is the government, therefore all stimulus policies dependant on debt expansion are impossible. From that, mortgage lending will not resume and house prices will continue to fall. When capitulation occurs hold onto your hats.
    Stillthinking (my commenting name!)