July 29, 2008

Don't panic ... unless you are Gordon Brown

Mortgages have hit a record low. This is natural, it is simply the market correcting. There was a bubble, it burst, prices are therefore going to fall back to more realistic levels before the cycle starts up again. As prices fall people will take their property off the market restricting supply until supply and demand equalise. Wait a few years and people will start investing again. A few years after that the TV property programmes will once again be popular. A few years after that people will be screaming how this is a new paradigm and the boom is going to go on forever. At which point you sell. All this has happened before and all this will happen again, to quote Battlestar Gallactica. There is no need to panic. Well, that is unless you where stupid enough to take out a 125% mortgage with Northern Rock in which case panic is probably your only hope. The biggest holder of Northern Rock mortgages at the moment is the UK taxpayer thanks to the government, but unlike any rational person they do not only not want to get rid of this toxic garbage they, the government, are actually proposing schemes to lumber us, the taxpayers, with more of it.

it may be necessary for the government to guarantee new better quality mortgage backed securities, to re-stimulate demand for these securities.

That may be necessary, Sir James is expected to say later this morning, in view of the government's objectives of supporting financial stability and operating in the long-run interest of consumers and the economy.

Except that it isn't in the long run interests of the economy. The banks made the mistake of issuing these mortgages so the banks should suffer the consequences. The ones that made the biggest mistakes will suffer the worst consequences, the ones that made less will fair better. By preventing the banks form having to face up to the consequences of their actions they will not learn from them and so will just make the same mistakes again, and possibly on a bigger scale since this time they will know that it is taxpayers rather than themselves who will have to foot the bill should things go wrong.

It isn't needed either. The market is correcting itself but as always this is not a smooth process and will oscillate up and down as it searches for the correct level given the new circumstances. Currently there is a bit of a downward swing as the banks get back to competing for new customers, without any need for government intervention.

Lloyds TSB has trimmed its mortgage rates for the second time in 11 days in the latest sign that lenders are responding to a slight easing in wholesale borrowing costs.


Several UK mortgage lenders have trimmed mortgage rates this month in response to a decline in the cost of interest rate swaps, used by banks to price fixed-rate mortgages.

Lloyds's latest rate cuts follows a similar reduction by C&G on July 17, while lenders including HBOS, mutually-owned Nationwide, and Woolwich, the mortgage arm of Barclays, have all reduced their rates in the last two weeks.

The market will correct its own excesses and probably be growing again in a
couple of years time according to the National Housing Federation.

Average house prices in England are set to rise by 25% by, 2013 a National Housing Federation report claims.

However 2013 is not soon enough to save Labour form an electoral apocolipse. Hence their desire to lump tax payers with a bill that should be paid by those banks that made bad lending calls even if it will perminently distort the markets in favour of risky practices, but then what is long term damage to the country compared to short term political gain for the Labour Party?


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