Prices fell by 1.2% in July, says Hometrack, picking up speed from June’s 1% fall, and a 0.5% slide in May. Meanwhile, Bank of England data out tomorrow is likely to show that the number of new home loans approved hit a record low in June.

But could we be on the verge of a turnaround? The weekend press was full of the news that some mortgage lenders are actually starting to trim rates. A few commentators even suggested that it was nearly time to go bargain hunting.

It’d be nice if it was true, and that this was the quickest ever property bust in history. Sadly, it’s just wishful thinking – here’s why…

Mortgage rates are falling – so is it time to go bargain hunting?

Property prices in Britain are collapsing. But the news that some lenders are starting to trim rates again has the optimists out in full flood.

Swap rates (the interest rates banks have to pay to borrow money, basically) have fallen back below 6% in recent weeks. This has allowed a number of lenders, including Nationwide (NYSE:NFS), Halifax (AMEX:HX) and Abbey, to start trimming their mortgage rates.

The average two-year fixed rate being offered by the five biggest lenders has fallen from 7.01% at the start of this month, to 6.78% now, says Moneyfacts.

A number of pieces in the weekend money pages tentatively started to suggest that this might be the time for bargain hunting. The basic point is – sure, lots of people still won’t be able to afford to buy, but for those who can, it might be time to do so.

One writer suggested that “there is still huge pent-up demand for buying property. First-time buyers, bargain hunters, and professional investors are all eagerly waiting in the wings for a sniff of recovery.”

The suggestion is that if these new buyers start to “make their move” as mortgages become more affordable, then the trickle of interest “could soon gather momentum as those who have been holding our act fast to avoid missing out on a bargain.”

This idea of mortgage demand being like a vast reservoir only being held back by the dam of the credit crunch is quite appealing. But it makes no sense.

“Pent-up demand” is a nonsense concept, economically speaking. Almost anyone will buy almost anything at the right price. You could say there’s a lot of pent-up demand for a Ferrari that costs less than £10,000. You could say there’s a lot of pent-up demand for free pizza.

What the writer really means is that people haven’t yet reached the “revulsion” stage of the bust. That is, the point at which they have had their fingers burned so badly by property that they would rather throw their telly out of the window than watch another episode of “Location, Location, Location” ever again.

Certainly, attitudes are changing. You don’t hear the old “renting is dead money” cliché half as much these days. But there probably are plenty of would-be bargain hunters still trawling around in buy-to-let land, hoping to “buy on the dips”, as stock market traders would say.

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Source: Falling Mortgage Rates Won’t Stop the Housing Bust

Take this one…

According to “new analysis” from mform.co.uk, those still mad enough to want to get on the housing ladder but finding it hard to do so “can still beat the credit crunch by teaming up” with their friends, siblings or even (via websites such as sharedspaces.com) with complete strangers to get a mortgage.

It seems that up to 42 home loan providers, i.e. around 46% of lenders, ranging from regional building societies to major names such as Abbey, HSBC, Woolwich and Cheltenham & Gloucester, are still allowing multiple borrowers to apply jointly for a loan, with four people the typical maximum. And amazingly, some lenders set no limit on how many people can make the application, says the online adviser.

We hope that anyone tempted to join in such an arrangement exercises more common sense than this mixed bag of loan providers. When everything was going well, there might have been a tenuous case for jumping on the ‘property ladder’ using the multiple application route – even if based on the greater fool theory that there’s always someone more stupid who’ll pay a higher price. At least if it all went wrong the shared space in question could have been flogged to a greater fool fast.

But now, as house prices have started to tumble…forget it! The moment that negative equity raises its ugly head how likely is it that one-time friends, let alone strangers, are going to agree to remain trapped together in a starter home? Just watch those payment defaults rise and forced sales start to mount.

And who will be the winners in the battles about when to sell, how to sell and who owns what? The lawyers, of course. Though any applicants for this kind of mortgage won’t be the only idiots in the deal: the fact that such schemes are still being touted shows that too many of our big lenders still haven’t accepted the fact that house prices are heading south in a big way, for a long time.

How to chuck the UK’s financial credibility out of the window

That is, of course, assuming the economy isn’t bailed out with huge doses of extra liquidity. The next scary story comes from Peter Spencer, chief economist of Ernst & Young’s Item Club. He’s just warned that the Bank of England will “crucify” consumers unless the Treasury lets it abandon its current 2% target for the consumer price index (CPI).

If the 2% CPI target stays in place, interest rates won’t be able to fall, the Bank won’t be able to pump any more cash into the system to bail out the multiple application nitwits and Britain, says Spencer, will face an unnecessarily deep and painful economic slump.

According to the Telegraph, Professor Spencer feels that controlling the volatile elements of the CPI is too big a task for the Bank. So it should instead be left to focus only on “core inflation”, which excludes volatile (read rising) items such as food and energy prices.

This might sound compelling – and it would certainly make the Bank’s job easier – but it isn’t. This wouldn’t just move the goalposts but relocate the whole pitch somewhere else.

That doesn’t mean it hasn’t been done before, of course. It has. Only in 2003 did the Treasury alter the target from RPIX (the Retail Price Index excluding mortgage interest payments) to the European-harmonised CPI, which doesn’t reflect housing costs.

That caused trouble enough – it set the stage for the low interest rate environment, the personal debt crisis and the house price bubble of the last few years – but to change the target again would be to just chuck what little financial credibility the UK has left out of the window. As it is, long-term index-linked bonds now imply that CPI’s heading for 3.7% and staying there. We might as well give up any pretence of trying to maintain the value of pound sterling right now.

The answer to the dodgy debt problem: rig the prices

And talking of value, here’s today’s final shocking story. Remember all those bankers who blew more billions than most people can imagine on a load of bets on dodgy debt?

Well, their spokesmen have come up with another wizard wheeze. And this time it’s to do with something called ‘marking-to-market’, in other words, the system of valuing any assets they hold at prevailing market prices rather than at their cost price.

The Institute of International Finance (IIF), whose board comprises 20 Western institutions including most of the biggest losers in the crisis, says that while marking-to-market as a system has “generally proven highly valuable”, it isn’t any more. Instead it is responsible for creating a downward spiral in asset prices.

So the IIF wants to do some of its own goalpost shifting, proposing that, in “disrupted markets”, banks should be allowed to value instruments using their own models or at book value. The IIF wants “stable valuations” that “increase market confidence”. It also wants lenders to have the flexibility to move assets from trading books onto banking books, where mark-to-market rarely applies.

In short, the IIF thinks that market pricing is far too basic for the titans of high finance. So they want to ignore the market and its unstable prices, and to be able to value their mistakes at whatever figure looks best. Unbelievable! We’ll be keeping an eye on this one.

Source: Three Shocking Examples of the Financial Plight We’re In