Thursday, November 29, 2007

UK Housing Market Set For a Squeeze

Fears that the credit squeeze will hit the housing market were reignited on Wednesday after a warning that rising borrowing costs are leaving banks struggling to find the money to fund new mortgages.

Three-month interbank interest rates - the price at which banks borrow from each other - hit 6.59 per cent on Wednesday, a level not seen since the week the Treasury stepped in to save Northern Rock depositors.

Raised borrowing costs are dealing a severe blow to smaller lenders, who have few alternative financing options, the Council of Mortgage Lenders said on Wednesday. Figures from the Land Registry showed the first tentative signs of house prices falling in London - 0.6 per cent down in October on the previous month.

The rise in three-month sterling Libor came as Jackie Bennet, head of policy at the CML, told a City audience it was an illusion to think banks' retail deposits could cover any shortfall in wholesale funding for mortgage lending. "There is not enough retail funding about to fund mortgage markets if the capital markets do not open next year," she said.

Net mortgage lending in the UK has averaged about £9.5bn a month over the past year, while Bank of England figures show retail deposits have grown by an average of £6bn a month over the same period. With short-term wholesale lending markets seized up and other funding strategies, such as covered bonds, facing difficulties, the shortfall in bank financing is likely to drive up mortgage costs, making loans harder to obtain

While many in the markets are still hoping the Bank of England will intervene to boost three-month liquidity, senior bank officials are saying privately that they are unsure there is anything they can do to temper the rise. While they have met banks' demands for immediate liquidity - holding the overnight Libor rate at close to 5.75 per cent - they are unsure if they should cut rates on longer maturities even if they felt it would work.

The Bank's reticence in providing term liquidity contrasts with that of the US Federal Reserve. On Wednesday, Don Kohn, the second most senior official at the Fed, dropped what investors saw as a clear hint that it was willing to cut interest rates again next month if market conditions did not improve. His comments, that the central bank would be "flexible and pragmatic" prompted a surge in global stock markets which sent the FTSE 100 up 2.7 per cent at 6306.2. The Eurofirst enjoyed its biggest one-day rise for more than four years while the S&P 500 was up 2.58 per cent at luncthime.

But for all the cheer in equity markets, economists expect little good news in the coming days. The first concrete sign of a crunch in credit availability is likely to emerge this morningwhen Bank of England figures are expected to show a large fall in mortgage approvals for October. Weaker house-price inflation figures are also expected to be published by the Nationwide building society.

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