麻豆社

Banks' self-fulfilling fears

• Robert Peston
• 23 Apr 08, 08:31 AM

When banks were prepared to provide mortgages equal to 100% of the value of properties, it was because they - like most of us - foolishly thought that it was the natural order of things for house prices to rise.

Now that banks have rediscovered the financial law of gravity, they are insisting that house purchasers provide at least 10% of the price in the form of a deposit - so that homeowners, and not banks, would be exposed to the first 10 percentage points of any market fall. And the new norm for the better mortgage deals still available is a deposit of at least 20%.

But banks' change in behaviour acts as a downward ratchet on prices: the fear that prompted the tightening up of lending practices becomes self-fulfilling.

They have made it respectable for all or any of us to expect a 10% fall in house prices. It means rational purchasers would now ask for at least 10% off the asking price for any residential property, to protect themselves from the impact of a falling market.

Sellers may simply say no. But some will capitulate - and in time the new market clearing price would be where we are now minus 10%. How quickly that would happen is difficult to predict. Some agents are saying it's already happened. After all these months of gloomy prognostications about house prices, it will probably happen fast, like a dam bursting.

However that would not necessarily be the end of it.

Even after prices in general had fallen 10%, the buyer of any particular house could never be confident that the particular property he or she wanted to buy was being priced 10% below its peak. Houses are not like shares, where every minute change in value is recorded for posterity.

It means that even after prices have started to fall, it would still be rational for a buyer to demand a 10% reduction on the asking price, as insurance. Which is why a general expectation that prices are to fall 10% would probably precipitate a fall significantly greater than 10%.

That's one of the reasons why house prices have a tendency to drop more than is economically justified on the way down, as much as they had a tendency to overshoot on the way up.

So the banks' collective decision to withdraw all 100% mortgage offers just like that - and thus send out a signal that they fear prices could fall 10% - may not turn out to be the prophylactic measure they hoped.

Depending on the magnitude of the housing-market downturn it precipitates, banks could end up poorer as a direct consequence of their rediscovery of the virtues of prudent lending. Just deserts some might say, except that millions of homeowners would feel poorer too.

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