The housing market is in much better shape than it was before it crashed in the early 1990s, Alistair Darling said on Wednesday, insisting that similarities with the troubled US market had been exaggerated.
Most house price measures have fallen over the past three months and mortgage approvals have plummeted since the summer, but the chancellor told an audience of manufacturers that “market conditions today are very different to those we saw in the early 1990s”.
Speaking at the EEF manufacturing body’s annual dinner, he acknowledged that lenders were facing “tight conditions” in mortgage finance and pledged action to aid the recovery of wholesale mortgage markets, something he said was “essential to stabilising the housing market”.
The Treasury currently favours a German-style private sector approach, with a clearly structured wholesale mortgage financing market, rather than a US-style government agency that lends money to banks in return for mortgage-based collateral.
The Council of Mortgage Lenders is pressing for the more interventionist US approach, since it fears there will be a £30bn shortfall in mortgage finance this year. It points out that the European mortgage-backed securities market has been effectively closed since last summer and retail bank deposits will be insufficient to cover normal demand for mortgages this year.
David Miles, chief UK economist of Morgan Stanley and the author of a 2004 government report into the mortgage market, also called last month for the government to consider lending directly to banks, for fear that the mortgage market might face a severe squeeze.
The Treasury has not ruled out direct lending to banks, along the lines of its proposed refinancing of Northern Rock, and insiders said it would give an assessment of the option in the Budget on March 12.
But it favours a private sector solution to create a more deep and liquid market for wholesale mortgage finance, backed by a supportive legislative regime. It notes that German lenders have still been able to access finance in the Pfandbriefe market in covered bonds – essentially bank IOUs linked to mortgage assets.
Mr Darling said the Treasury would consult on creating “a ‘gold standard’ for covered bonds and mortgage backed securities”, which he hoped would “help not just the housing market but wider economic growth in these uncertain times”.
He indicated that he disagreed with the ever louder talk of an imminent housing market crash. “Interest rates remain at comparatively low levels, as do mortgage rates,” the chancellor said. “And unemployment is currently at 30-year lows.
“What’s more there are important differences between the housing market in the US and the housing market here.
“While many US mortgages were sold at hugely discounted rates leaving people unable to meet repayments when rates increased, lenders in the UK have been more responsible in taking account of an individual’s ability to pay. And demand for housing outstrips supply,” the chancellor said.
