Credit supply is still the big issue.
Posted on June 15th 2009
Possibly everyone reading this column hopes that the recent positive signs in the housing market are real and that this is the start of a bottoming out of house price declines. I for one hope this is the case but I am still hugely cautious; generally you only see the bottom by looking backwards as forward looking indicators often predict false dawns. The key issue is supply of credit, the Halifax and Nationwide house price indices in my opinion are just showing a temporary mismatch in the supply and demand dynamics, that is to say that demand is slightly up whilst the supply of houses for sale has gone down.
Back to the supply of credit; according to the BofE the difference between what our banks have lent out and what they have borrowed from savers and institutions is £740bn compared to nil in 2001, or in other words British banks have been raising about 40% of all the loans they have made from wholesale sources. The gap was largely funded by borrowing money from China, India and other booming eastern nations who have now been spooked and really don’t want to lend us any more money. So now our banks have to find a way to wean themselves of this wholesale debt and the way in which this has been done so far is to borrow from the taxpayer. So far the taxpayer has lent or guaranteed the banks about £600bn but many believe this is not enough to balance the deficit, therefore it is very possible that we have not reached a state of equilibrium yet. I hope like all of you that the bottom of house prices has been reached but I am of the opinion the supply of credit has not yet reached a sustainable level that will keep house prices on an even keel.
