2008 market overview
A year ago we reported that the economic difficulties then emerging were better described as a “banking crisis” than the “credit crunch” or “credit squeeze”. This was in the aftermath of the spread of the sub-prime mortgage contagion from the US to Europe and the rescue of Northern Rock by Her Majesty’s Government in September2007. 2008 was the year in which financial institutions collapsed, causing global turmoil. In the second half of the year, the banking crisis claimed institutions deemed “too big to fail”, such as Lehman
Brothers and severely crippled sovereign states including Iceland,Hungary, Latvia, and mutated into a systemic economic crisis which initiated recession in most developed economies. The UK Base Rate ended the year at 2%, its lowest level since 1951.
Property, and the relationship between property and banking, is at the heart of the economic crisis and the rapid emergence of the recession. Acres of newsprint have been devoted to this complex relationship during 2008 and it serves no purpose to repeat the unprecedented and dramatic story here. Instead, Figure 1 outlines the main events of the second half of 2008 set against a graph showing the volatile and bearish FTSE 100 Index.
One of the key statistics throughout the banking crisis has been the volume of mortgage approvals, as a proxy for the numbers of sales (excluding cash buyers). The UK banks’ preference to engage in remortgage business resulted in only 39,900 new mortgage approvals in October 2008, an 60% drop on July 2007 (CML). Homeowners paid off £691 million more than they took on in new borrowings in September 2008 – the first instance of “negative” borrowing in the monthly Bank of England figures since the previous recession in 1993.
The precarious position of most UK banks, and their culpability in the crisis, was underlined on 25th November 2008 by the Governor of the Bank of England in an appearance before the House of Commons’ Treasury Select Committee. In his view, restoring normal credit levels was the most crucial issue in recovering from the slump and that if there was no thaw in lending to business and individuals,
the UK would go into a steep recession. In these circumstances, “British banks”, he said, “risk wholesale nationalisation.” We know from our own experience that perfectly good risks are being rejected by banks as they continue to hoard cash. There is a danger here of the banks contributing to a vicious circle that undermines their own asset base. The rationing of debt is the most significant factor causing lower asset prices in the property market.
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