Talking up the house market is not the answer to slump

Published on Friday 13 March 2009 19:11

LOWERING your expectations to avoid crushing disappointment is one of the harder lessons you learn as a kid. As innocence turns to acne, trying not to get too excited about something becomes an exercise in self-preservation.

It makes it all the more surprising that the housing market is being talked up to the extent that it is. Markets are about confidence and talking them up is a key stage on the road to recovery – but if that recovery doesn't arrive on schedule, misplaced confidence can be counterproductive.

Green shoots are being spotted in various statistics. This week they have come in the form of buyer interest, which has now risen for four months in a row, according to the Royal Institution of Chartered Surveyors. Estate agents need all the good news they can get and there's no more encouraging sight than people walking through their doors. Sadly for them, they are then walking back out, down the street to their lender and being told to think again. Buyers are willing to take advantage of prices that are nearly 20 per cent lower than a year ago – as well as the stamp duty holiday and low repayment rates – but lenders are flashing the red light.

Buyer interest means nothing when mortgages aren't there and until they are, house sales are likely to remain close to record lows.

The only people that can boost the market now are lenders, who need to use the money that the government has lent them to stimulate the market.

RBS made a start in pledging to make 1.7 billion available for borrowing in Scotland – with potential for more to come – although much of that was already projected. In the meantime, house prices will continue on their downward journey, perhaps more slowly but enough to deflate those rising expectations.

But what is too rarely noted is that prices need to continue falling for at least the remainder of this year. Prices are only back to 2004 levels, which were already unrealistic for many buyers. Only when they have fallen by at least 30 per cent from their peak will estate agents start seeing buyer interest converted to sales, facilitated by the traditional lending practices we arguably need to return to, where deposits are put down and loans are only given at around three times income.

IF I was given a quid each time I read of how another aspect of the economic crisis was giving pensioners a particularly hard kicking, I'd probably have accumulated a nice round 90.70 by now.

A timely example was supplied on Monday by the Institute for Fiscal Studies, which confirmed that older and poorer households face far higher average inflation than their younger and better-off counterparts.

Then it became apparent that the latest economy boosting weapon, in the form of the Bank of England's quantitative easing (QE) plan, has the unhappy side effect of hitting retirees where it already hurts. As explained on this page, it transpires that people buying annuities on their retirement will lose out on vital income as a direct result of the 75bn cash injection plan, due to its impact on gilt returns.

This offers a useful reminder as to why the decision-making process around taking income at retirement has to be better. The figure usually reeled out here is 20 per cent – that's the estimated extra income annuitants could gain by shopping around for the best deal and it far outweighs the impact of QE on annuity rates.

Of course, millions of people are already with the providers paying the most competitive annuity rates, such as Aegon and Prudential. Millions of others are not, however, and they are victims of a system that isn't working. The open market option (OMO), which allows investors to buy their annuity from any provider on the market, was used by just over a third of investors last year. This is despite a warning from the Financial Services Authority, which last summer gave insurers six months to do more to tell investors about their income options. It's now time to make the OMO the default option because retirees need all the help they can get in this environment.