The Alternative View

In the Hitchhiker’s Guide to the Galaxy, the book written by Douglas Adams, Zaphod Beeblebrox wore a pair of “Joo Janta 200 Super-Chromatic Peril Sensitive Sunglasses”; they had been designed to help people develop a relaxed attitude to danger. At the first hint of trouble they turned black, preventing the wearer from seeing anything that might alarm them. I have the feeling that many participants and commentators in the mortgage market have had a supply of these for sometime now.

Although the market is in far better shape than it has been for a while and the stock market is booming, there are still a number of issues out there to be solved before we can have any real understanding of what a ‘normal’ mortgage market might be and whether we are experiencing it?

 The first and most crucial is how the market will fund itself when the government withdraws funding support from the banks. The ‘special liquidity scheme’ which saved the industry and country from a complete melt down can’t go in indefinitely. The government, whichever one is elected on 6^th May, will have to figure out how they withdraw funding, support and guarantees from the banking sector estimated at some £300 billion. This black hole has to be filled from the money market and securitisation sector that is still as dead as a dodo or potentially retail deposits. If the government continues with their support, the rating agencies and international investors may decide that these liabilities are no longer emergency funding and should therefore be added to the government’s overall liabilities. If nothing changes it could be goodbye to our AAA rating and some serious difficulties in balancing the fiscal books.

The next issue is how long can the UK keep interest rates this low? The Bank of England has been creating money electronically, in effect out of thin air. It has used this to buy assets – mainly its own debt (gilts, very handy if nobody wants to buy them). This has ultimately fuelled the stock market and given the banks some super profits; the Bank of England has said they’ve now stopped but may start again if required. However, this ‘printing money’ will need to stop completely at some point as it creates hyper inflation if it goes on too long. Investors in UK gilts don’t like inflation and tend to get very edgy if it goes over 2% for too long - and we are already at 3%. Any more inflationary pressure will mean interest rates will rise and faster than many people may think. A run on the pound could change everything very quickly.

Finally, many analysts think that house prices are still too high. We are almost back to where we were before the crisis, which is very different to the US market where the housing boom is still very bust. This is because interest rates in the UK have a direct impact on house prices and rates are unsustainably low. They will go up at some point. When they do, some borrowers will have to sell as affordability is still stretched. With the number of buyers still low, if we have a glut of property on the market, house prices will have to fall and this will have a knock affect for banks and the economy. We are far from out of the woods just yet.

 I think we all need to be a bit more realistic, and throw away the “Joo Janta 200 Super-Chromatic Peril Sensitive Sunglasses!”