Here’s a cheery prospect: according to the FT, the leading trade body for mortgage lenders reckons that if the Government insists on withdrawing its £300bn of financial support over the next four years, as planned, it could mean that mortgage lending – and consequently, the whole UK housing market – grinds completely to a halt. The issue is that banks are being encouraged, quite rightly, to lend based on retail deposits – but we’re just not going to save enough in the next few years to cover mortgage demand. Yet if the Government does continue to plug the gap, it’s going to add yet another huge sum to our burgeoning national debt…
Since the onset of the financial crisis, the Government has channelled the best part of £200bn to the banks via the Special Liquidity Scheme, which effectively allows them to swap mortgage bonds for cash – and another £100bn or so through the Credit Guarantee Scheme, which allows them to raise debt from the markets. Unfortunately for the banks, this isn’t a gift: the Treasury wants the first lot of cash back by 2012, and the second by 2014 – which isn’t that far off, as far as the banks are concerned. Now, the FT reports, the Council of Mortgage Lenders has written to the Government warning that its members could end up without access to sufficient funds, potentially forcing them to stop lending mortgages. That would make buying that bijou semi in Bayswater a little tricky.
In the long-term, the Government wants banks to lend money they’ve actually got, i.e. based on deposits from retail savers. Since one of the things that got us into this mess was allowing banks to borrow vast sums on the wholesale markets to fund mortgage lending, fuelling a massive housing bubble, that makes sense. The issue is that there just aren’t enough deposits floating around; we are saving more cash, but not to anything like that extent (more like £6bn than £300bn, the Bank of England reckons). So unless we're willing to accept a fundamental shift in the overall level of lending, the only other option is those pesky wholesale markets. But they’re still not functioning properly - and even when they do, they’re likely to be much more expensive. If it costs the banks more to raise money, you can guarantee it’s going to cost us a lot more to borrow it.
The CML reckons the Government needs to keep filling this gap, as it is doing at the moment. But there’s a catch, as the BBC’s Robert Peston points out – if this becomes a long-term pledge as opposed to a short-term loan, we’re effectively adding £300bn to our national debt. Which is hardly going to improve Britain’s fiscal reputation. Either way, there's a choice to be made here: if we really want a less risky lending set-up based on deposits, the process of readjustment is going to be extremely painful in the short-to-medium term. Are we really ready to put up with that?
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