23 February 2009

Reviving the housing market

When I read over the weekend that Gordon Brown is proposing to put an end to 100% mortgages, it put me in mind of horses bolting through stable doors. Exactly who in command of their senses would now be either requesting or granting a 100% mortgage?

And now I read that the UK government is going to attempt to revive the housing market through Northern Rock. But that presupposes that lending has stopped because the banks don’t want to lend rather than because households do not want to borrow.

That may be true now, while would-be house purchasers are still suffering from an overhang of optimism, but I cannot imagine that it will be true for long.

Having begun to read Richard Koo’s “The Holy Grail of Macroeconomics”, it seems pretty clear to me that we are now entering a balance sheet recession, in which businesses and households will be keen to pay down their debt and during which asset prices will continue to fall for some time.

Anyone attempting to buy a house now must be mad. And any politician attempting to revive the housing market is almost certainly being irresponsible. It is unlikely that any householder taking a mortgage out with Northern Rock this month will be thanking Mr. Brown in a year’s time.

d. sofer