A year on from Northern Rock, what next for mortgages?
The question of whether the government can rescue the mortgage market is now being asked by its own advisers, as if the mortgage market can be sorted out in some kind of a vacuum, detached from the rest of the banking sector.
I can understand ministers want to stabilise house prices, and that making more mortgage finance available might do that. It is proof that not even the government believes its theory that the rate of new house building determines house prices, for if it did, it would be delighted not many houses will be built this year, and would be urging the cancellation of more building projects to halt falling prices.
Meanwhile, over at the Bank of England they are less concerned that house prices are going down than that the prices of energy, food and other essentials are going up. They could take action to make more mortgage money available by cutting interest rates to stimulate mortgage demand, but that might lead to more money being borrowed, pushing up the prices of other things.
The FSA could help stimulate mortgage supply by relaxing banks’ capital requirements, but that too is unfashionable after a period of too much lending without the capital backing the regulator now thinks is needed.
No joined-up thinking
There is no evidence of joined up thinking between the government, central bank, the FSA and the banking sector about what to do. The Bank and the Treasury have lurched away from last summer’s view that banks should sort themselves out. But they have not arrived at a new consensus on how loose or tight they now want monetary policy to be. There are some home truths the government needs to grasp before it makes more foolish statements about the mortgage market. They need to understand mortgages cannot be detached from other types of lending to people and companies.
Meanwhile, the Bank of England needs to realise that keeping interest rates too high is preventing a housing recovery. The nationalised Northern Rock is also damaging the market, as a major lender is unable to increase its mortgage book.
Finally, the government should accept it cannot keep house prices up, stimulate more mortgage lending, cut inflation and place a windfall tax on the banks all at the same time.
The government’s current policy is incoherent. Interest rate policy is encouraging house price falls. Banking regulation is restraining new advances after a long period of allowing lending growth. House building and planning policy is trying to encourage further price falls.
Attacking banks for being too careless in their lending, as the Chancellor did last year, encourages a more restrictive attitude towards lending.
John Redwood, MP for Wokingham, is a former director of a merchant bank.