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£37bn bailout - what does it mean for property?

You wait ten months for a morsel of good news, then three come along all at once.

The government's emergency £37bn recapitalisation of the UK banking sector means fundamental changes for Royal Bank of Scotland, HBOS, Lloyds TSB and Barclays. But can it fix the ailing property sector? Short term no, longer term, maybe.

The first piece of good news arrived last week when the Halifax released its latest housing figures.

The lender said the average house price fell just 1.3 per cent in September, the slowest margin for the last seven months, according to its house price index. These figures may indicate that the property market is already starting to stabilise.

The average house price is now £172,108 - a drop of 12.4 per cent compared to last year.

Lenders remained optimistic last week that the half a per cent cut in the Bank of England base rate would help borrowers and provide a valuable support to the housing market - the second piece of good news.

The Prime Minister's intervention on Monday remains the biggest factor - but investors, developers and analysts will remain highly cautious.

Shares in London rebounded this morning and there were sharp gains throughout the rest of Europe, after the UK government announced the injection into Britain's biggest high street banks.

The FTSE 100 climbed 248 points to 4180 this morning, a gain of 6.3%.
Shares in Barclays jumped 12% to 232p, Lloyds TSB gained 10.6% to 209.5p and HSBC was up 7.2% at 848p. News of the government's capital injection failed to lift Royal Bank of Scotland, which dropped 4.9% to 68.2p, and HBOS, which fell 5% to 118p.

The Treasury announced its unprecedented rescue plan after leaders of the 15 eurozone countries unveiled a rescue plan for their troubled banking systems at an emergency summit in Paris last night.

The summit followed weekend talks in Washington, in which the IMF, the World Bank, the G7 club of rich western nations and the broader G20 group all called for action.

Gordon Brown confirmed that his government will pump up to £37bn into Royal Bank of Scotland, Lloyds TSB and HBOS in an effort to save the UK's banking sector from meltdown.

Although it is not a rescue package to revive the housing market, these two factors are of course linked at the hip.

The government secures a controlling stake of up to 60 per cent in RBS, in return for up to £20bn from the taxpayer.

Lloyds TSB, after renegotiating its takeover of HBOS, will receive up to £17bn once the merger goes through. This will leave the government owning up to 43.5% of the enlarged group, with Lloyds shareholders owning 36.5% and HBOS's investors just 20 per cent.

The Chancellor Alistair Darling said on Monday that the action was necessary in the 'extraordinary circumstances' affecting markets worldwide.

But here was the key: "...we're also getting guarantees in relation to increased lending to businesses, as well as to mortgages too."

Mortgage rates had begun to drop when the bank of England announced a surprise rate cut of half a percentage point, but some lenders continued to withdraw the best deals last week even as rumours spread of the detail attached to the Government's bailout plan.

Expect more rate cuts, but is this going to be enough for a wholesale market revival?

The problem remains lenders who are removing mortgages with a Loan-To-Value of 95 or 90 per cent out of the market. There are currently less than 3,500 mortgage products available, the lowest figure yet since the credit crisis began last summer, although that is certain now to rise.

Underlying market condition cannot be ignored, despite the optimism. Property prices at home and abroad will ultimately determine our fate, not politicians.

The Standard & Poor's/Case-Schiller housing index showed prices in July down 16.3 percent from a year ago in 20 US cities, a record fall.

UK house prices fell by 12.4 percent in the last year, according to the latest figures from the Nationwide Building Society - the second largest mortgage lender.

The Nationwide's statistics show that the average price for a home is now £161,797, compared to a peak of £186,044 in October last year.

And whereas recent property booms have been based largely on pricing, lenders are now focussing on risk, which is reflected in the scarcity of loans. Expect 100 per cent mortgages to only be reintroduced at inflated prices.

The best deals for mortgage customers will still be found in 60 per cent LTV loans, where a 40 per cent deposit is required, therefore protecting the current credit injection, as vast as it is.

Whether the bailout will rescue Britain from recession is in itself not yet clear.
The International Monetary Fund last week predicted that the UK economy would fall into recession next year as growth forecasts were cut for the period from 1.7% to -0.1%.

British companies are struggling, with Ernst & Young warning last week there were 111 profit warnings from quoted companies in the three months to 30 September.

Unemployment remains a threat, with many leading companies cutting jobs.
The Office for National Statistics is expected to release data on unemployment on Wednesday, with forecasts suggesting a rise in the claimant count of 35,000 to 940,000.

More worrying are the growing number of repossessions. Unemployment and repossessions are the two factors that could see the property market fall further if the bailout fails to impact in the longer term. No one is looking for a fast fix, although we are nowhere near to the number of cases that were seen in the peak of 1991.

The number of homeowners in England and Wales facing repossession rose to a 16-year high in the summer and some still fear this will get worse.

The number of court orders for mortgage repossessions rose to 28,568 in the three months to the end of June - the highest since the third quarter of 1992, when 30,587 orders were made.

Mortgage lending fell by 95% last month as the lack of finance made it increasingly difficult for first-time buyers to step onto the property ladder. This is the area the Government's bailout must impact upon.

Mortgage lending fell to £143m in August according to the Bank of England. This was less than five per cent of the £3bn of net lending in July and the lowest level since records began in 1993.

Mortgages for house purchases fell by 70 per cent in the year to August to stand at just 32,000.

The government said the number of houses being sold in Britain fell to its lowest level since 1959 in August.

Mr Brown will firmly believe his plan has rescued the bank sector. Whether it can do the same for the property sector is too early to say.

  • by Stephen Neale
    13 October 2008