Cinematic endings
Gordon Brown has moved to the forefront of global crisis management, but improvement in the UK still depends on the housing market
Rescue efforts are fraught with danger, involve great risk and require much good fortune.
If the ongoing attempts to recover the British banking system from an abyss are akin to a frightening action movie, we are currently nearing the end game. The good guys appear to be triumphing over the forces of evil. The difficulty is that there’s always a twist before the finale.
Our self proclaimed hero, Captain Gordon Brown, is wielding his last, and most controversial weapon against the Credit Crunch enemy. It goes by the name of ‘quantitative easing’.
The problem with Captain Brown’s final solution (which in simple terms involves printing more money, but is not half as crass as it sounds) is that because interest rates are already at an all time low, if quantitative easing does not work, there is only one outcome: a downward spiral into the pit of rising unemployment and a housing market crash. So what are the chances of a horror ending? The key to this Brit movie, as ever, is house prices.
Commentators have spoken long about the ‘dire state’ of current property values. The reality is that the housing market is no where near the crisis point of previous recessions. The difference between problems in the UK and US is that Captain Brown has done his very best to artificially support over-inflated house prices.
Make no mistake, the Americans intend to do more. The Obama administration has set aside a $75bn air programme to help mortgage defaulters renegotiate loans.
But the issue in UK is that while house prices have not yet crashed US style, they rose much, much further after 2000.
In January, Nationwide said prices dropped 15.9 percent during 2008. It was not nearly enough. A glance at some basic statistics tells us why. Government figures show the average combined salary for a couple in 1958 was £1003.60, while the average home cost £2,390 - almost two and half times more.
By 1968 combined incomes were up to £2,048.80 with house prices at £4,344, and in 1978 the couple’s salary was £7,025.20 and house prices were £15,594.
Move forward 10 years to 1988, and the UK wages to homes ratio tripled for the first time. By 1998 things had returned to relative normality, with the average yearly salary for a couple at £39,306.80, while the average UK house price was £81,774.
What happened to prices after 2000 is what has caused the current climate of despair.
Even after a market drop off over the last 24 months, the 2008 average home cost was £199,730, compared to a combined wage of £58,292 – a ratio of almost four.
For this reason alone, we must expect house prices to continue to drop, perhaps by as much as 20 percent.
What governments on both sides of the Atlantic are determined to do is keep people in their properties while values shrink and job losses mount.
Chancellor Alistair Darling announced last year a scheme to allow borrowers to defer mortgage payments temporarily if they are made redundant.
The government’s asset protection schemes will encourage bankers to lend more despite fears over market weakness.
Captain Brown’s quantitative easing programme will inject more energy into the struggling economy. Can these unique measures work long enough for the markets to recover? I suspect they will. The alternative? There is none, only a dark hole.
