29 | 07 | 15

A house built on sand

Posted by: andrewlund


In a recent speech the Bank of England’s Sir John Cunliffe reviewed the fall-out from the Financial Crisis and in doing so drew attention not only to the massive burgeoning of credit that led to the bust but how that credit was misapplied to non-productive investment (speculation). The numbers are sobering. In 1997 lending by UK banks stood at the equivalent of 95% of GBP. At that time the stock of non-property lending to companies as a proportion of GDP stood at 19%. By 2008 UK banks had leveraged their balance sheets to the level where lending had reached a stratospheric 170% of GDP but the second of the aforementioned measures had only reached a paltry 23%. So where did all the money go? The answer, it appears, is that it went to inflate an unsustainable bubble in property. 

 


The problem is, of course, that whilst property is useful in providing a roof over one’s head it is not of itself a means of production.

 


The main legacy of this misapplication of resource is a pitifully poor level of productivity. The Government has finally woken up to the fact that it is by increasing productivity that better living standards are delivered across society at large. So something has to be done to incentivise lending for investment in production rather than lending for speculation in property. In a paper entitled “Fixing the foundations: creating a more prosperous nation” HM Treasury states:- 

 


……the Chancellor has highlighted the importance and priority that the government attaches to ensuring the supply of finance to productive investment, to competition and innovation, and to the competitiveness of the financial services industry.” 

 


So how will Policy makers go about promoting a shift in the investment habits of both lenders and borrowers?

 


The answer is that they will use a combination of fiscal measures and macroprudential powers. On the fiscal side the first glimpse of this at work in the property market concerns the treatment of “buy to let”.

 


In announcing the phased withdrawal of tax breaks for BTL landlords the Government said:-

 


“This will reduce the distorting effect the tax treatment of property has on investment and mean landlords are not treated differently based on the rate of income tax that they pay. It will also start to shift the balance between landlords and homeowners.”  

 


As for macroprudential tools the government has already given the Bank of England power to intervene if LTI and LTV ratios get overstretched in the owner-occupier sector and further tools aimed at cooling the BTL mortgage market seem to be in the pipeline.

 


Will it work? For the last 30 years the UK economy has been driven by boom and bust cycles linked to credit fuelled speculation in property. In effect the economy is a house built on sand. Putting in some solid foundations is not going to be straight forward.

Andrew Lund
Andrew Lund

Compliance Officer for Legal Practice

Andrew oversees the Firm’s Quality Systems and is committed to making sure that our client’s receive the very best customer care and attention along with the best marketing and legal advice in the area.

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