Sunday, September 16, 2007

I was going to say "No sub-prime opportunities for Londoners (yet)"

Before the flu caught me, I had wanted to write a short peace on the potential effects of sub-prime in the UK and how this might not all be bad.

Quite a lot seems to have happened in the last few days so I risk being a little behind the times but I think the argument is more valid than ever. Northern Rock plc, a former building society, has been forced to borrow from the Bank of England as a "lender of last resort". Its share price tumbled and scenes I have never witnessed in my lifetime occurred at normal High Street British bank branches as investors queued to recover their deposits. Internet banking added another dimension with bigger sums being withdrawn online.

In a sense this makes the troubles of the bank a self-fulfilling prophesy as such high levels of withdrawal (the BBC reported today that the total since the news broke was £2 billion) will only add to the pressures on the bank.However I do sympathise with those trying to make withdrawals.

Several rather snooty comments have been made about the panicked depositors showing a herd instinct but for those who have their life savings involved rather than a current account, it seems better to be safe than sorry. Too many times those in authority advise there is no risk only to be proved wrong at the expense of those who listened to them.

Such scenes stem from the credit crunch from America's sub-prime as borrowing gets more difficult. Northern Rock a relatively small Newcastle based bank has expanded aggressively by borrowing securitised credit to enable growth far bigger than would have been possible through the deposits at its 75 branches. This growth now appears to have been built on the shifting sands of sub-prime.

However a bank failure seems unlikely and as has happened in Germany and the US recently, a buy out by a bigger bank on knock-down terms seems likely in the next week or so.

What I originally wanted to say is that there may be a silver lining to this, even now.

London is a City where the average home costs £300,000 and nothing is to be had in any form below £100,000. In the UK as a whole the average home costs £200,000. Yet the average salary has not risen so dramatically – around £30, 000 per annum for the average London male worker and considerably lower for women and in the provinces. With these averages the lack of affordability in the housing market becomes apparent.

While stock markets move nervously down and then up, merchant bankers face trimmed bonuses (sob) and dark whispers of City job losses begin, there is no evidence that the effects of the American sub-prime crisis are yet having any effect on British (let alone London) house prices.

While some surveys refer to a slowing in the rate of increase, even this is not a consistent theme. Overall the direction of house prices remains clear- upwards.

I don't want this to turn into a synopsis of a rather tedious middle class dinner party conversation.

However while sub-prime is in the news I think it is worth noting the positive possibilities from this "crisis":

1)Housing might actually get more affordable for those without it at present. While those who own houses (me included) would want their own home to rise in value indefinitely, this is surely a bit short sighted in the long term. In the last decade British property prices have at least tripled and in London the rises have been even steeper. A progressively aging group of middle class property owners acquiring ever more wealth while the young and the less well paid struggle to find somewhere decent to live is not a recipe for stability. Anyone with children will surely want their own children to afford somewhere to live. If prices were to keep rising at their current rate by the time young Luis is in the market, he'll be looking for over £1million just for a small flat. This seems unsustainable and pricing whole swathes of the population out of home ownership. The sub-prime crisis, if exported here, might wipe a few smiles off some rather smug faces but could make property affordable to many more people.

2)Sub-prime losses will remind banks to lend responsibly.
3)Sub-prime losses are a reminder to borrowers not to borrow over their head.

In short sub-prime needn't be a catastrophe as long as it is managed to prevent wide scale loss of homes.

Sub-prime is more about the power of the market to match supply and demand. Prices are too high so demand will fall. Sub-prime is also a slap on the wrist to irresponsible lenders and those corporations who "dabble" hoping for some cheap finance.Sub-prime may bring pain but it also brings opportunity. This may be heresy for some but I hope a little rubs off over here……. (In light of Northern Rock this all seems a little more likely now…)

No comments: