House-buying fun part two – lawyers, surveyors, house prices and interest rates

Gary McFarlane
23 January 2008

I'm a great fan of Charles Dickens's Bleak House, and in particular the recent BBC TV adaptation. Among other things it is a searing indictment of 'lawyering'. In this profession a job that ordinary folk would imagine should take a few days to sort out somehow seems to take an age, and the lawyer's fees pile up accordingly. The more things change the more they stay the same...

Our house sale and purchase were agreed by all the parties in the chain in early December. I'm told that not a lot happens in December in the property and conveyancing world - for the perfectly understandable reason that people don't like buying houses and Christmas presents at the same time. A fair point then, but we are now approaching the end of January and still we have no completion date. Probably par for the course in the lawyering trade.

However, lawyers, like estate agents, are an easy target, and I should balance my comments by pointing out that the nice couple buying our flat are first-time buyers who have had to get their mortgage through the housebuyers scheme for keyworkers. And, as you might imagine, this government scheme is something of a bureaucratic quagmire. But whatever the reason for the delays it serves to further illustrate what a maddeningly frustrating business house buying and selling is. Oh well, I suppose it gives me more time to mull over the state of the housing market, the wiseness, or otherwise, of moving now and the future direction of interest rates.

Surveyors and house prices

As per usual we are getting contradictory signals on house prices in London. The influential Royal Institute of Chartered Surveyors recently reported the steepest fall in house prices since November 1999. Meanwhile, property website's house price index claims to see signs of recovery, and actually a small rise in asking prices in London, as buyers emerge from the sidelines to snap up cheaper properties. But if our direct experience is anything to go by prices are not falling so much as not rising at the same astronomic rate.

I say this because we were forced to lower our asking price by £10,000 and so were the owners of the property we were buying, despite the fact that the area of north London we are buying in is meant to be something of a hotspot. The role of those influential surveyors in all this was pivotal. It was the surveyors report on our property that concluded it was overvalued and so the homebuyers scheme lenders stumping up the mortgage refused to provide the £210k for the purchase price. Our nice couple became a bit frantic as they thought we were going to pull the sale. But as it happpened the surveyors report on the property we were buying flagged up about £15,000 or work that needed doing on our 'victorian cottage', such as replacing all the sash windows (and being in a conservation area they had to be wood windows which retail for around £1,200 a go). The sellers were as quick to lower their price as we were ours.

My conclusion from all this is that it is definitely a buyers market out there... and probably will be for some time to come. And although surveyors are pretty staright bunch I can't help thinking that it may be the case that just as they were eager to talk up prices in the heady days of the property boom they are now equally as eager to fan the flames of slump. I exaggerate but hopefully you get my drift.

'Rock' solid interest rates

If you are buying a house for the primary purpose of living in it, as opposed to seeing it as an investment, then whether prices are going up or down is neither here nor there. That might sound like a strange observation to make in many parts of the world where houses/flats are bought or rented to be homes, but here in the UK quite a number of people have been buying houses primarily as an investment and not as a place to live. If you're in that game then falling house prices matter because it means the value of your assets is shrinking. Buy-to-let investors beware.

But what does concern the little people like me, and perhaps you, is how much it is going to cost to borrow the money to buy that house. In this regard we might all like to ponder on the thoughts of George Soros, speaking from the World Economic Forum in Davos, on Radio 4's Today programme this morning. He told us that the days of cheap money are over, despite the US central bank's panic move of cutting rates by 0.75%. "Market's don't always correct themselves and the authorities should have known this," he mused. And he should know, being the financier who famously bet on the devaluation of the pound, helping to force the currency out of the European Union's Exchange Rate Mechanism back in the nineties. Soros explained that he wasn't against the Federal Reserve cutting rates to stop the stockmarket collapsing because if they didn't it could lead to an economic depression. But what he was very clear about was that the banking system had been allowed to get into a hell of a mess and that a recession in the US and UK was now "probably unavoidable". In plain English the central bankers have been asleep on the job and need to start doing some meaningful regulation of the financial markets.

Northern Crock

This brings me to the discussions I've had with work colleagues and relations over recent weeks on the subject of Northern Rock and whether it is possible for the media and commentators to 'talk us into a recession', or a bank run for that matter. Now I was taught economic and social history, admittedly by a bunch of leftie lecturers, at Hull Uni, and if I'm not mistaken it is very hard to lose money in the usury business. But that was when banks were banks.

Believe it or not there was a time when banks made their profits by taking in deposits and then lending that same money out again at a certain rate of interest, although keeping a small portion of it back in case some of the depositors wanted to withdraw their money. The income from the interest could be turned into even more lending and a virtuous circle of profitable business transactions was set in motion. Also the profits of the businesses that the banks lent to would likely find a home with the very same banks that they borrowed from, further adding to the banks' deposits and the funds available to lend. You can probably appreciate that the whole system is predicated on liquidity - being able to freely lend and borrow. So imagine the shock to the national psyche, and Northern Rock's depositors, of the first run on a bank in Britain for over a century. Even during the Great Depression of the 1930s there wasn't a run on a British bank.

Northern Rock became the fifth biggest mortgage lender in the UK by borrowing short-term and lending long, at very competitive rates. But what this meant in practice is that, unlike our model banking institutions described above, the Rock didn't fund itself through the deposits of individuals and businesses. Instead it borrowed over 70% of its funds on the 'wholesale market' (although it now borrows most of its money from the UK taxpayer). In other words it borrowed on the international money markets, and in the most opaque manner possible. It packaged up its mortgages into 'securitised debt' known as CDOs (collateralised debt obligations) and then sold these on to other financial institutions. All very good until, that is, the credit crunch came along and banks recoiled from lending to each other because they didn't know if they would get their money back as the US sub-prime mess infection spread.

The Rock's business model was shot to pieces - and so they had to go begging to the lender of last resort, the Bank of England. The news got out (those dastardly journalists again) and on one day alone last year - 14 September - depositors took £1billion out of the bank. Many of my colleagues said this was irrational media-induced panic because the assets of Northern Rock are solid as a rock. Well sort of. But what if interest rates rise from the historically low levels of today and lots of those borrowers find they can't repay their loans? As Meryvn King the governor of the Bank of England reminded us all today - don't expect any large reduction in interest rates this year. The wisdom, if that's the right word, in the City is that rates will only come down by a maximum of 0.50% this year, and might even have to go up if inflation gets out of hand.

One of the main arguments in favour of the Rock's business model seems to have been that lots of banks do it so it must be okay. Well, therein is the rub - and precisely what Soros was on about on the radio this morning. So, far from the media talking us into a recession I think this one, if/when it comes to pass, was made in the City of London and Wall Street, which is why I feel a lot more comfortable fixing my mortgage interest rate for 10 years at a level that is still affordable.