As British taxpayers discovered to their cost during the financial crisis, big banks such as Lloyds Banking Group and Royal Bank of Scotland Group were simply too big to fail.
When it came to the crunch, we had to bail them out. If we hadn’t, the entire banking system would have collapsed, and taken the UK economy with it. The only beneficiaries would have been tin food manufacturers as a panicking population dashed to stock up their larders.
Big And Bad
The financial regulators have subsequently cracked down on banks, forcing them to build their tier 1 capital ratios, shrink their investment banking ambitions and limit risky lending. Slashing interest rates and launching QE helped ease the transition.
The banks are no longer the biggest domestic threat facing the UK economy, that dubious honour now belongs to the housing market. At the start of this year UK homes were worth £5.75 trillion in total, around 2.7 times GDP, according to Savills. The UK property sector is too big to fail and the regulators are partly to blame, because their easy money policies have ramped up house prices to today’s crazy levels.
The property market is now a Ponzi scheme. It can only be kept going by sucking in new blood at the bottom, and banks are happily obliging by opening up a new front in the mortgage price war, with a blitz of cheap deals aimed at young buyers borrowing 95% of their property’s value. Precisely the ones who are most vulnerable to a crash.
Dash To Crash
Property experts assure us this isn’t anything to worry about, that low mortgage rates make today’s high house prices affordable. They point out that last year’s regulatory clampdown, the Mortgage Market Review, has forced lenders to tighten their criteria and “stress test” borrowers against future rate hikes. Strong demand and supply shortages justify today’s high prices, they say.
Their self-justifying arguments seem plausible, but only while interest rates are at all-time lows. If base rates climb to around 2% or 3%, let alone their long-term average of 5%, their logic will come crashing down like so much bricks and mortar. Too many homeowners just can’t cope with higher borrowing costs.
That won’t happen though. Despite its macho talk, the Bank of England is running scared of hiking rates, because it can foresee the impact on cash-strapped households. It may make a token move – only if the US acts first – but will continue to hold rates low for years, storing up even bigger problems for the future.
They say the greatest trick the devil ever pulled was convincing people he didn’t exist. It is the same with the housing bubble: people no longer worry about it. They assume prices will stay this high for years, and they may well be right. The bubble won’t burst because policymakers won’t allow it, regardless of the distortions this policy causes.
The housing market is too big to fail. It must be protected at all costs, even if it means trashing the rest of the economy.