| Mortgage lenders alone cannot hold back double dip in UK housing market Until last month, lenders have been able to keep UK house prices relatively high. This cannot lastRarely has a forecast come true so quickly. On Wednesday, the International Monetary Fund warned that there was a risk of a double dip in Britain's housing market. Within 24 hours, the Halifax reported that the cost of a home had dropped by 3.6% last month, the biggest one-month fall on record.The scale of the drop took most – if not all – City analysts by surprise. Although recent months have seen a marked slowing in housing market activity, prices have edged only slightly lower. Today's snapshot of prices from the Halifax was out of line with most other recent surveys.But, as the IMF noted in its World Economic Outlook, house prices in Britain still look expensive. Despite the stamp duty exemption for homes worth less than £250,000, it is still tough for first-time buyers when lenders are demanding hefty deposits.Traditionally, a lack of first-time buyers has been the catalyst for prices to fall to a level where they are more affordable. The reason they haven't, at least up until now, may have something to do with the policy of "pretend and extend" adopted by lenders.Insiders say the thinking goes like this. Imagine you are a bank that has 10 mortgages on houses from the same street, each of them valued on the books at £100,000. One of the mortgage payers is in arrears. As a bank, you have the choice of repossessing the house but you know if you do so it will probably fetch only £80,000 when resold.The problem for the lender is not just that it makes a £20,000 loss on one home but that the book value of every other house in the street also has to be adjusted. At a stroke, the bank's assets have been reduced by £200,000. In these difficult times, no bank wants to destroy the asset side of its balance sheet.As a result, lenders have gone easy on borrowers in difficulties, giving them more time to pay and turning a blind eye when they fail to meet their monthly payments in full. This is the "extend" part of the equation, and has resulted in a much smaller number of repossessions than during previous downturns. By keeping people in their homes, lenders have prevented house prices from falling, thus retaining their theoretical book value. That's the "pretend" part.The problem is that "pretend and extend" only works for so long. Some people still need to move, while others will be so financially hard-pressed that they will face foreclosure. The lack of first-time buyers eventually has an impact. That, simply, is why there will be further falls in house prices, and why the weakening market will trigger a policy response. The Bank of England left policy on hold today, but an extension of the quantitative easing programme now looks far more likely over the coming months.Housing marketRecessionHouse pricesFirst-time buyersLarry Elliottguardian.co.uk © Guardian News & Media Limited 2010 | Use of this content is subject to our Terms & Conditions | More Feeds guardian.co.uk |
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