By definition, to be a bank you must transact. If you sit and do nothing you are just an investor. Banks take in deposits and pay interest on them (in theory), make loans and charge interest on those. Their profit of course is the difference between the two – which obviously came as news to Northern Rock.
The trouble is that too few people can afford the terms that the banks want on the loans they are offering and they have found that they are not lending any money. The latest numbers from the Council of Mortgage Lenders makes grim reading. They desperately need more punters to borrow money whilst at the same time looking for ways to keep their Loan-to-Value ratio down so that they look like they learned the lessons of the Credit Crunch. At present you need to find more than 20% to get them to lend the other 80% but this means there are few who can afford their products. They have tried to encourage parents to step up and plug the gap but they need new gamblers.
Having persuaded all the gullible parents that they should help prop up the ‘Ponzi’ style housing market they are now roping in the tax payer by getting local authorities to stump up the deposits for first time buyers. If this was such a good idea then the tax payer could still enjoy the ‘commercial opportunity’ that Councils are being sold since we own a huge chunk of Lloyds and presumably the bank could offer the service to over-stretched first time borrowers direct. Even simpler, why not just up the loan-to-value? Oh yes, because Halifax (owned by Lloyds Bank) think that house prices will fall this year! “Overall, we expect a modest 2% decrease in house prices in 2011. Uncertainty over the economic outlook is likely to weigh down on housing demand this year.” said Martin Ellis, their housing economist on 4th March.
Like the sign on the farm gate says, “Beware of the Bull” although in this case it refers to the product that the banks have persuaded councils up and down the land to sign up to. We should all be concerned that local authorities seem keen to use council tax money to bet on the housing market. The threat is not so much the lenders themselves by an large neutered post Credit Crunch, its the ‘poo’ they talk and the fact that they don’t appear to have learned the lessons of 2008!