The return of banking monopolies

There is an mass of desperate housing speculators out there restlessly waiting for the housing market to bottom out. Over the last couple of weeks, an assortment of newspapers and industry groups has been feeding the hope that the catastrophic collapse of house prices has stopped. The RCIS recently published some data showing that buyer interest, that most nebulous of housing market data, has been ticking upwards. Likewise, Rightmove claims that seller asking prices are beginning to rise again.

So has the housing market begun to trace out a turning point? Housing inflation, which is after all what all property speculators want to see, depends on one thing - credit. If homebuyers cannot borrow, they cannot buy overpriced houses. The housing market collapse was driven by declining mortgage lending; the market will not recover until lending increases. It is simple and as complicated as that.

Recent mortgage approvals seem to have stabilized. In a typical month, UK banks are now approving a little less than 40,000 mortgages. During the bubble years, the number was around 120,000. Crudely speaking, mortgage lending is down by about two thirds. That number is going to have to pick up considerably if we are to see recovery in house prices.

Are we likely to see lending picked up any time soon? A recovery will require the return of non high street lenders to the market. Mortgage approvals from major UK high street banks haven't really fallen by that much. It is the little banks that have scampered off.

I suspect that the mortgage market has fundamentally changed. The banking crisis has squeezed out marginal players, and reduced effective competition. The government aided and abetted this increased monopolization of the market by designing their bail out interventions to favour the larger systematically important banks.

With competition now reduced, high street banks have an incentive to reduce supply permanently, in order to maintain large interest-rate spreads. It won’t be so easy to return to the bubbly years that preceded August 2007.

(A quick word about the chart; some readers may ask how total lending can be below lending of major UK banks. The major UK lenders series covers gross lending approvals. The total lending series includes net cancellations, and therefore can fall below gross approvals data.)