Housing market: how the Bank of England’s bail-out affects homeowners

The Bank of England’s £50 billion special liquidity scheme, variously described as a bail-out for banks and for the housing market, was unveiled last week amid much fanfare. Alistair Darling and other ministers met mortgage lenders to urge them to treat borrowers in difficulty with compassion and not set off a wave of repossessions.

So, what does it all add up to? Mervyn King, the Bank governor, says he does not see his scheme bringing a return to the “rather wild” lending that prevailed beforelast summer. The Bank would be mortified if it did, and does not want to go back to the double-digit house-price inflation of a year ago. Instead, it wants a continuation of the housing adjustment, which King diplomatically describes as several years of broadly stable prices.

Fortunately, there was nothing in his announcement last week to prevent that happening. The credit crunch has had two effects on the housing market: the first is on the availability of mortgage finance, the second on its price. The new package will do something to help on the availability question, making it less likely that a warning by the Council of Mortgage Lenders (CML) of a possible halving of lending this year will come to pass.

As we have already seen, however, it will be some time before borrowers benefit from lower mortgage rates, even if the Bank continues to cut official rates. In time, money markets will free up and the all-important Libor (London interbank offered rate), an important determinant of how

David Smith Times Online