Posted by Gilmour Poincaree on November 26, 2008

Wednesday November 26 2008 00.01 GMT


The Guardian

This financial crisis began with housing, and any hope of its ending must lie with housing. That THE HOUSING MARKETdoes not just mean house prices finding some kind of bottom, but also would-be homeowners being able to get fairly priced mortgages, and securing a more stable supply of new homes. Consumers naturally focus on the prices quoted by estate agents, but yesterday both the government and the Bank of England were more worried about getting banks to lend. That is a big question in need of an urgent answer, but it is only one part of the housing puzzle. Until all the bits are solved, this boom and bust will be repeated over and over again.

Just how important is housing? Consider this. Politicians have spent the past couple of days arguing over the government’s £21bn boost to the economy. That is a big number, but it is dwarfed by what is going on in the mortgage market. There, last year’s net total of £108bn of new home loans has shrunk to around £40bn this year and could fall below zero next year. What was a hundred-billion-pound business will shrink to nearly nothing. No wonder Mervyn King, the governor of the Bank of England, told MPs yesterday that getting banks to lend “was more important than anything else at present”. Without that, he warned, “a steep recession” beckoned.

How to end the mortgage drought? Alistair Darling appointed Sir James Crosby, the former head of HBOS, to suggest ideas. His final report was published on Monday and went (understandably) underreported, but its recommendations are eye-popping. In the summer he was equivocal about government intervention; this time he is emphatic. He suggests that Mr Darling should help get the banks themselves greater access to finance that can then be passed on to would-be homebuyers. At the bubble’s peak nearly two-thirds of mortgage lending came not from deposits, but via money markets – which are nearly frozen. The Crosby report suggests that the government should auction its services as a guarantor to banks seeking to tap into financial markets. In return, the government must require that the funds go into new mortgages.

Like so much else the government has done over the past weeks, this a big, bold gamble – and Mr Darling is right to take it. True, matters have not been helped by the government’s arm’s-length management of the part-nationalised banks, when what is needed is much more hands-on direction of lending. But banks are themselves struggling to raise money to lend. This scheme could help ease the problem and Mr Darling is right to adopt it.

Still, there is a vast chasm between a technical scheme drawn up by a financier and a policy taken up by a government. That difference can be summed up in one word: vision. The short-term priority must be to allow the property bubble to deflate in as orderly a fashion as possible so as not to send further shocks through an already traumatised economy. But over the longer term, house prices must come down and orgiastic lending and wild property speculation must be curbed.

The challenge for Mr Darling is to manage this transition. What he must not do is restore the housing market to some kind of health, only for it all to soar away again. That means ministers changing their minds on what housing is for. Gordon Brown has long believed that as many people as possible should own their homes: “a home-owning, asset-owning, property-owning democracy” was his slogan. But housing is a public good: having enough houses at fair prices ultimately matters to any society that needs teachers and nurses. To turn property into a private asset is to court bubbles, buy-to-let madness and supply problems. This financial crisis has raised many questions over where the boundary between public and private interest should lie. The housing bubble is no different.



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