Editor's blog - Falling house prices are not a cause for alarm

The government is apparently guilty of trying to ensnare first time-buyers into negative equity by offering the banks the chance to swap their mortgage backed securities for government backed bonds. Or at least so says Alice Miles in today's Times.
But this isn't strictly true.

It's not that much of what Ms Miles says in her opinion piece is incorrect. I agree with a certain amount of it and, of course, she is entitled to her opinion. But to lay the blame for the current financial crisis on Gordon Brown and the Labour government is going a bit too far. I'm not necessarily a fan of the current government but to claim it is Labour's fault banks are not lending to each other is pushing it a bit.

After all, how can she say Labour's call for mortgage lenders to pass the 0.25 per cent rate cut made by the Bank of England onto borrowers is encouraging first-time buyers into negative equity? It's no such thing. It's asking lenders not to profiteer from the Bank's rate cut, which in some cases a few of them could be accused of doing. They would argue it is about ensuring they maintain their liquidity, but they have always taken their time to pass on rate cuts to borrowers, while responding with incredible swiftness when the Bank of England has increased interest rates.

Ms. Miles makes the point that the problems in the housing market are home grown and to some extent she is correct. But to discount, as she does, the international element of the global financial slowdown is bonkers! I still can't bring myself to call it a crisis, not because I'm in denial but because the amount of money that changes hands in the modern world today is so large as to dwarf the £1 trillion that has been suggested will be lost by banking institutions around the world.

House price inflation over the last five years has admittedly been crazy, even scandalous, and has always appeared, to me at least, to have been unsustainable. That's one of the reasons I never bought a house – although not being able to afford one either ranked pretty high on the list of reasons for not doing so as well.

It is also true to say that for most of us mortgages haven't suddenly become wildly more expensive and I agree with her when she says: "What part of two year fixed rate didn't you understand?". As a few people in the mortgage industry have said to me recently, if interest rates stay at roughly below seven per cent, inflation stays low and there isn't mass unemployment then this will be a storm we can all ride out. Moreover, the current financial situation isn't that much worse than when the dot.com bubble burst.

I do agree with Ms Miles when she says that just because my house may have lost value it's not the end of the world, the bigger house up the road that I've always wanted to move into will have probably lost money as well – so long as it's not in a crucial school catchment area in which case it probably won't have done.

It is also true the government did well out of the City boom and that the tax collected was more often than not redistributed through greater public spending, but I'm not sure we can blame a Labour government for doing what comes naturally after all, especially after the lack of investment in public services that had existed before.

It is certainly important that we don't turn the drama of declining house prices into a crisis as some national newspapers have seemed hell bent on doing in recent months. I'm also not concerned about a few City boys losing their jobs, they've been making an awful lot of money in recent years and I'm sure if they haven't all blown it - most of them will be fine.

To most of us a fall in house prices might be a welcome thing - smaller mortgages for a start. The only people adversely affected will be those unfortunate enough to have bought just as the fall in prices was kicking in and did so on 95 per cent and 100 per cent mortgages.

But the problem is they will be first-time buyers, who traditionally have fuelled the housing market and without them the market – so the thinking goes – grinds to a halt.

If first-time buyers can't get a mortgage then people can't move up the property ladder. And if mortgage lenders don't have money to lend they won't lend to first-time buyers.

But negative equity is only an issue if you want, or are forced, to move! So to say Gordon Brown and co are encouraging first-time buyers into negative equity is nonsense! Most first-time buyers stay where they are for an average of two years or more. Most people still only move two or three times in their entire lives!

So coming up with a plan to encourage the mortgage lenders to start lending again isn't a lack of prudence. In fact it’s the government finally taking a step in the right direction. It won't stop the fall in house prices but it might at least stop the rest of the economy grinding to a halt and that is far more important.

Ask anyone you like but if you're worried about negative equity and you don't have to move - and I'd say not very many of you out there do actually have to move but I know a national newspaper or two that will claim you're in your hundreds of thousands – stay put, don't put the house on the market, sit tight but whatever you do don't panic!

Matt West