Monday, 30 March 2009

Mortgage approvals up

Mortgage approvals are unquestionably up. In February, 38,000 home buyers persuaded their banks to hand out a loan. Approvals are now at their highest level since last May.

However, does this number represent the bottom? As the months roll forward, will we see mortgage approvals continue to recover? Possibly yes. Lending could pick up quickly. Suddenly, I am feeling slightly nauseous. This might be the beginning of something really nasty.

Over the last six months, the government dispensed unparalleled levels of state aid to the banking system. While the recapitalizations were essential, the guarantees could set off a sudden gushing torrent of lending. It is, after all, precisely what Brown and Darling would like to see.

At the same time, the Bank of England slashed interest rates to zero. I said at the time, it was an unnecessary over-reaction. Now I think it might be worse than that. For all practical purposes, the bank rate has now become totally detached from the rest of the economy. If lending does accelerate, the Bank of England has no effective means of controlling credit growth.

Mervyn King might also be waking up to the danger. Already he is back tracking on the quantitative easing. Other members of the MPC are warning that should inflation take off, rates might have to rise awfully quickly. Still, I am not sure if they really mean it. After all, inflation would eat into those oppressive household and public sector debt ratios.

The serious point here is that the Bank of England and the Treasury may have enormous difficulty in unwinding the policy errors of the last six months. It will be hard to withdraw those generous guarantees, eliminate all that excess liquidity and hike interest rates high enough to re-establish monetary control.

In the meantime, the UK economy continues to spin around in the chaotic and incoherent policy framework established by Brown, Darling and King.

12 comments:

Sackerson said...

Oversteer, huh?

Alice Cook said...

Sackerson,

Exactly, oversteer, and then off the side of a cliff.

Alice.

dearieme said...

Perhaps people think that they are buying TIPS - Totally Inflation-Proof Shelter.

Anonymous said...

I've seen a factor-of-three so often in before/after statistics over the last twelve months that it seems a sound rule of thumb.

There was about 200% too much credit generated by the silly 'clever' stuff.

If mortgage lending goes above a third of what is was at the 2007 peak (if it has is not clear from the chart), then this is oversteer, causing more pain down the road.

Of course, only a third of the credit that was available up to 2007 means pain, pain, pain, pain for the UK economy, I reckon for six to nine more years, by which time we will all have more respect for economic cycles.

B. in C.

peterthepainter said...

there is no such thing as an economic cycle...

Stands With A Bowl has eliminated economic cycles...

there are now booms and zombie booms...

powerman said...

I'm interested who the mortgages are being issued to.

Are we seeing activity likely to result in house prices increasing, or are people being forced to secure credit card balances against their house because those lines of credit are being withdrawn?

I honestly don't know the answer.

Anonymous said...

Lots of sold signs in kent.

mike said...

Average loan sizes now down to 118K. So that means average price houses of around 150K if you assume a reasonable deposit.

Anonymous said...

End of 2009 will look like this: pound at par with the US dollar, interest rates at 15%, hyperinflation on all goods, house price bubble back on, but unemployment substantially up.

So how does this work? Because of Britain's rancid welfare state, its economy operates on the whirlpool principle. There is no UK economy but in fact various whirlpool economies scattered around. The London, high-end lifestyle whirlpool for example. The whirlpools will be stoked into action, but they will sit beside the Great Welfare Beach of Waste: millions and millions of people rotting away on some welfare scheme or another.

powerman said...

Interest rates at 15% may well still accompany inflation in consumables such as food and fuel, but I don't see how it could accompany a bubble in things bought on credit and priced in pounds, such as houses.

The confusion over whether we're in inflation or deflation seems to stem from people not making a seperation between 'stuff bought on credit' and 'stuff paid for in cash'.

electro-kevin said...

I trust that you won't get so locked into an agenda that you fail to view things objectively, Alice.

look said...
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