“What do you think of Sterling’s performance yesterday?” I asked a neighbour a day after the mini-Budget. “Dreadful,” he answered. “He just couldn’t get the ball across to Kane.” No, I clarified: “The pound versus the US dollar, not Raheem versus the Italian defence.”
Reactions among pundits to England’s sorrowful relegation in the UEFA Nations League were positively exultant compared with markets’ response to chancellor Kwasi Kwarteng’s growth plan. A litany of tax cuts came hot on the heels of massive support for energy users – pushing up forecast government borrowing to stratospheric levels.
Despite most of the details having been leaked, the pound went down faster than the speed at which the Chelsea and England striker regularly crumples in the box. Before the speech, the pound traded at $1.13. When Asian markets opened the following Monday, it was down to $1.03, within a whisker of once-unthinkable parity.
Worse, UK government bond prices plunged. Yields – which go in the opposite direction to prices and govern a vast range of borrowing costs, not least mortgages – leapt. The benchmark 10-year gilt rose from a tad under 3.5% to over 4.5%. Lenders withdrew a swathe of mainly discounted mortgage deals and housebuilders’ shares, which had been sliding all year, plunged by 13% on the week.
Economists queued up to dismiss Britain as an emerging markets basket case, while journalists stepped up their chorus of an impending house price crash. Even Tory stalwart the Daily Express forecast “mass forced sales”.
Mass repossessions unlikely
Tosh. Of the various apocalyptic outcomes postulated, mass repossessions look the least likely. The last time that happened was in the early 1990s crash (almost 300,000 in five years). This was in an era when 95% mortgages were common currency for first-time buyers, unemployment went over 10% and banks were far less regulated.
Now, unemployment is at a 48-year low of 3.6%, high loan-to-value loans are a relative rarity and banks are far better capitalised and policed. In the wake of the financial crisis, the then Labour government leaned on banks to limit repossessions, at least of owner-occupiers; how much more likely is a Tory administration to follow suit?
Forced selling is one of the two forces most likely to spark a ‘crash’. Strangled lending is the other. During the financial crisis, banks didn’t just withdraw and reprice mortgages – they paused most new lending altogether. This time around, the Bank of England had to intervene again, purchasing bonds to contain yields.
But it was in response to the more esoteric and, apparently, contained risk of derivative exposure in pension funds; in 2008 it was in the face of a global liquidity drought. New unforeseen threats do have a habit of emerging from the woodwork in the increasingly complex world of banking, but meltdown seems, for now, off the cards.
A quick ring around of some of my better-informed market sources suggested stories of collapsing sales and buyer interest were well wide of the mark.
Yes, it was the most ham-fisted Budget in decades. But the ensuing fury drowned out much that, with caveats, could support the housing market and housebuilders: stamp duty cuts (particularly for first-time buyers); almost 40 ‘Investment Zones’; a general economic stimulus (if Kwarteng’s sums add up); public land to be released; and (few builders will be holding their breaths) faster planning.
A week is a short time in politics, economics and football. Days after England’s humiliation in the San Siro stadium, some pride was restored in a creditable effort against Germany that belied the 3-3 score line.
The Bank of England’s bond buying (a fraction of the £65bn first signalled) – and Kwarteng’s ‘Cruyff turn’ on the 45p top tax rate – took the pound back to $1.15, gilts settled back below 4% and builders’ shares revived.
A salutary lesson on the supposed primacy of markets is economist Paul Samuelson’s quip: “The stock market has predicted nine out of the last five recessions.”
Alastair Stewart is an equities analyst and consultant