I have been saying for some time now that the best use for Government money currently is to stabilise the prices in the housing market, which will in turn encourage people to spend more on the High Street than they are doing. High Street spending represents around 60% of GDP.
The best means to stabilize the market is for the Government to provide new mortgage lending to people who want to borrow – at sensible commercial rates and at a sensible rate of credit risk, bearing in mind the personal circumstances of the borrower.
The problem has not been the small number of people wanting to buy property at the moment, but rather the lack of bank lending allowing them to buy property – despite them having good jobs and available deposit money.
The Government previously had tried lending money directly to all the UK banks in order to get them to increase their general lending but, as other sources of borrowing have dried up (like the interbank market), the banks have been keeping the money in order to shore up their dubious balance sheets.
So finally the UK Government has seen the light and U-turned on its policy of running down the Northern Rock mortgage book. Northern Rock was nationalised last year by the Government. Instead of running down it down, it aims to lend an extra £5 billion in new mortgages this year and up to £9 billion from 2010. To help fund this expansion of lending, the Treasury will provide an extra £10 billion in taxpayer’s money to the bank. Some mortgages would be lent at up to 90% of the value of the property being bought – these mortgages used to be common but are currently hard to find.
Last year, net lending in the mortgage market by all lenders was £40 billion, whilst this year the Council of Mortgage Lenders forecasts that lending could be minus £25bn – ie more mortgages money will be being paid back than borrowed. So the extra £5bn from Northern Rock this year might be very significant.
With the value of all new mortgages currently averaging £112,000, an extra £5 billion of lending would amount to around 45,000 averaged-sized home loans per year. That would be approximately equivalent to the number that were lent each month last year by all lenders in the UK.
You might wonder why the Government structured the payments as £5 billion this year and £10 billion next year, when the need is more urgent this year. The reason hasn’t been revealed as yet, but it is clearly because lending money into a falling market is politically dangerous – it opens up the Government to a charge of wasting money. However, by next year, prices should have fallen sufficiently far enough so that a fresh injection of £10 billion should help stablize prices rather than just reduce the speed at which they are falling – which is what the £5 billion in 2009 will do. The Government seems to have acted intelligently in this case, although £15 billion is not enough.
This is because the Government