Assetz® News - Banking on it

Banking on it

13th October 2008 |

Those keen on investing in property often do not need banking finance to do so. The sale of an existing property or the use of funds built up over time will do to make another acquisition.

But for many this is not the case. Mortgages will be required, even if not for themselves than for others looking to buy a property before they can sell their current one to an investor. A healthy mortgage market means a greater flow of properties.

Following a few months in which these activities have decreased, the government set up its banking rescue scheme last week, offering new capital and liquidity to leading banks in return for a government stake. Today the Treasury was able to announce details of the first movements under the deal. On what BBC business editor Robert Peston called "perhaps the most extraordinary day in British banking history" on which some large institutions suffered "an absolute humiliation", the Royal Bank of Scotland, Lloyds TSB and HBOS dipped into the funds to the tune of a combined £37 billion. The Lloyds TSB and HBOS cash injection is dependent on the merger between the two still going ahead, with the terms of this changing at the weekend.

It was also revealed that Barclays has opted not to join in this bail-out, preferring instead to seek £6.5 billion from investors and shareholders while axing its £2 billion end of year dividend.

What matters now for those seeking to buy property is that this capitalisation and the provision of new liquidity should ensure a greater flow of lending to businesses and individuals, including, of course, mortgages.

How much this should happen may be a moot point. The Council of Mortgage Lenders (CML) raised a query today when it read the part of the Treasury statement that said an aim of the scheme is "maintaining, over the next three years, the availability and active marketing of competitively-priced lending to homeowners and to small businesses at 2007 levels". The CML suggested that to seek to restore 2007 levels of mortgage lending and borrowing in the current climate is unlikely to be "prudent or desirable".

Of course, it remains to be seen just how much growth can be achieved. But the fact that some banks have bitten the bullet of the "humiliation" of going cap in hand to a government that will take a stake in them suggests that they at least believe such a move can help restore their fortunes in the longer run, something that will require a gradual normalisation of credit conditions.

At the weekend, Gordon Brown attended a meeting of 15 eurozone member states, briefing them on the British plan and urging them to do something similar. This has been agreed and the prime minister was able to say at the end of the meeting: "I believe that in the next few days confidence in the banking system will be restored." If indeed it is, the property market may follow.