FTAdviser.com

Advertising

There has been little good news about the economy in the past four weeks and there has been a considerable body of evidence pointing to the further deterioration in the prospects for the economy in general and for the housing and mortgage markets in particular.

We have certainly been seeing lots of gloomy headlines recently. Even those of us of a relatively optimistic bent are wondering whether we should be becoming despondent. So how far do the headlines tell the true story? What hope is there that the UK will avoid a much talked about recession?

There are two key factors which are driving the pessimistic headlines at present: the downturn in the UK housing market and the pressures on inflation from higher world energy prices. There is absolutely no doubt that the housing market is suffering a profound downturn in activity. All the indicators confirm this: mortgage approvals, net mortgage advances and house prices, for example. The key issue for both participants within the sector and for the wider economy is how much longer will this downturn continue - after all, we are getting to the stage where activity levels cannot fall much further.

As the latest survey from the Royal Institution of Chartered Surveyors notes, new instructions to sell property in May declined for the fifth consecutive month and at the fastest pace since last June while, driven by a further reduction in mortgage availability, new buyer enquiries continue to fall. But while the bare headlines reflect current reality, I cannot help but feel that some of the media's reporting is verging on the misleading.

Yes, there is currently a recession in the housing market. But this does not mean that there will inevitably be a recession in the wider economy; nor does it mean that the housing market will not show some sort of recovery in the not too distant future. To take the housing market first. The current problem for the housing market continues to be the shortage of mortgage funding. There are lots of potential buyers: many of them in sound financial health and offering negligible credit risk. But they cannot get a mortgage because the banks and building societies do not have the cash to lend. The Bank of England's special liquidity scheme was intended to address this issue. But it is unclear whether the scheme will provide sufficient funds and it is quite clear that it is taking a considerable time for the available funds to reach the market.

Nevertheless, the logjam in mortgage financing will clear itself in time. I believe that the squeeze from the wholesale markets is currently at, or at least very close to, its peak. Funding will not become as liberal as it was before. But I do believe that it will not be as severely restricted as it is at present and that, consequently, activity in the housing market will pick up slowly over the rest of the year. As for the wider economy, it still seems markedly pessimistic to suggest that we are about to suffer a recession similar to that of the early 1990s - let alone, as I heard one pundit postulate on the radio the other day, a return to the Great Depression of the 1930s.

Yes, demand will grow very slowly over the next two-to-three quarters. Yes, demand may be so weak that it actually falls in one quarter - or possibly even two. But a fall in demand of 2.5 per cent as occurred between the second quarter of 1990 and the third quarter of 1991, let alone the 6 per cent fall recorded between the second quarter of 1979 and the first quarter of 1981? I think not.

Peter Charles is chief economist of Mortgage Express