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The end of the beginning?

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  • 06/04/2009
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At long last, some tentative signs of recovery in the battered UK housing market. Nationwide's month...

At long last, some tentative signs of recovery in the battered UK housing market. Nationwide’s monthly house price index revealed the welcome surprise that the average UK property increased in value by 0.9% in the month of March alone, a pretty substantial figure.

That news came hot on the heels of the Bank of England’s revelation that British borrowers repaid a record £8bn of mortgage debt in the last quarter of 2008 – the biggest injection of net equity since records began in 1970. Throw in the fact that mortgage approvals went up 19% in February, and you might start thinking that we have turned the corner.

But let’s not get ahead of ourselves. While a few brave commentators have started to call the bottom of the market, most (me included) are loath to herald a false dawn. Property prices have still fallen 15.7% in a year, and the consensus remains that they have further to drop. The £8bn equity shot in the arm is largely a function of dramatic falls in interest rates, allowing people to overpay simply by maintaining their monthly repayments, and encouraging them to use poorly-earning savings to run down debts – and rates can hardly get any lower.

Mortgage approvals are still less than half their pre-2008 monthly average, and with lenders sticking to tight criteria, many prospective borrowers will remain disenfranchised. It is the availability of mortgage finance, and not property prices, which will dictate when the housing market will recover. And the longer it takes to get the flow of credit moving again, the more bleak the economic picture will get.

It will be some time before we know whether the Bank’s rate cuts and ‘quantitative easing’ have worked to stimulate the economy, keep businesses alive and keep people in jobs – and houses. If it works, phew. If not, then unemployment can only rise. At the end of March, MPC member David Blanchflower warned the House of Commons that unless the Government spends at least £90bn on schemes to create and protect jobs, unemployment in the UK could double from its current level to four million. That is a huge figure, and the prediction is all the more worrying, as Blanchflower presciently forecast the scale of the economic crisis more than a year ago, and also anticipated unemployment reaching two million by the start of this year.

He also pointed out that there is a particular problem with younger people. Currently, 40% of the unemployed are 18 to 24 years old, and he noted that being jobless at such a key stage in their development could have a lifelong effect – such as normalising being out of work and living on benefits, presumably. This would also have a profound effect on the housing market, shrinking the pool of potential first-time buyers still further.

That pool has been drying up for years, thanks to rising property prices that excluded most people in their 20s from the market – except those with wealthy and generous parents. Now many of those parents are not so wealthy and less inclined to be generous. Compound that with fewer younger people able to borrow, and the chances of the market recovering in the foreseeable future are slight.

These foolish things

What was your favourite April fool this year? The Telegraph story about harnessing energy from migrating fish to generate electricity for UK homes? Jacqui Smith pictured coming out of Ann Summers laden down with bags in the Daily Mail?

My personal favourite came to light when a friend who works for Shell rang in a panic to ask whether, as a financial journalist, I knew if there was any truth in the suggestion that RBS and Royal Dutch Shell were about to merge. A story posted on the internet claimed that the failing bank and the struggling oil giant were to pool their resources.

It reported Gordon Brown as commenting: “It may seem strange, but the rectitude of the Scots and the Dutch is well known, and the link between the toxic assets of RBS in the sub-prime market and the toxic assets of Shell in Ogoni land shows the symbiosis between these two historically great corporations”.

Priceless. Though RBS’s share price did rise slightly on 1st April. n

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