Financial markets will face unbearable pressure when rates rise

 
Allister Heath

COULD the financial markets be about to have a heart attack? The reason I ask is a terrifying little document that has just landed on my desk. Entitled tellingly Capital Markets – the Arteries are Clogging and published by Redburn, the stockbroker, it highlights cogently a little-understood feature of the post-crisis economy. Liquidity, the lifeblood of markets, is drying up, collapsing by 35 per cent across government bond, cash credit and equity markets, and by 17 per cent across derivative markets.

This is being caused by the mass withdrawal of bank market making capacity, especially from over the counter markets, and is set to intensify as the regulatory onslaught continues apace (global wholesale and investment banks’ leverage ratios fell 40 per cent between 1999-2012). The result will be to make the capital markets less stable, cause price spikes, boost the cost of trading and reduce returns for investors, increase the difference between the price at which securities are sold and those at which they are bought (the bid-offer spread) and make it harder to trade in less common products.

Paradoxically, even though the global capital markets stood at a record $113 trillion at the end of last year, they have been characterised by a prolonged decline in volumes. All of this has been hidden so far by central bank hyperactivity, in another side-effect of QE and permanently cheap money. When the music finally stops, and monetary policy is normalised, the capital markets will not be immune from the chaos.

BUILD, BUILD, BUILD
HERE are a few more reasons why Britain’s broken housing market needs to be fixed, and fast, and why we need to build far more and better quality new homes. At present we build 40,000 homes on at most 2,000 hectares of green field a year, or 0.0001 per cent of England’s undeveloped space (12.8m hectares or so). The rest – under 60,000 – are built on brownfield. We need to keep up the brownfield construction, and perhaps do even more – in a sensible system turning the less attractive parts of Outer London into swathes of Islington-style terraced houses – but we also need to build drastically more houses on greenfields, mainly in commutable distance to London.

But our problem is not just about volumes – even though the UK needs at least 230-270,000 new homes a year, and in practice even more than that given that millions of people would love to upgrade to more modern, more spacious high spec properties if these were available – but about quality. One cannot build Notting Hill-style Georgian homes in London for at least half a dozen reasons, ranging from rules on what size and shape stairs must be to the fact that building more than four storeys high requires a lift to be fitted. Building detached cottages would be seen as too low density in most areas even if they were popular. Zero carbon homes push for particular styles and smaller windows to prevent heat loss. The list goes on and on, and is one reason why almost all new builds in London at the moment are flats, even though many people, especially those with families, would like semis or detached properties – a modern, prettier, contemporary version of the kinds that were built en masse in Victorian England or in the 1930s. The current coalition design review on Building Regulations seems as if it will marginally trim but not really resolve these issues. There was supposed to have been work published in this area in spring but it has yet to appear.

One problem is that the current system means that planners and housebuilders are so focused on numbers that design and build types are often below par. Improvements over the past decade haven’t gone far enough.

Housing is in crisis. The government must stop wasting time, and act.

allister.heath@cityam.com
Follow me on Twitter: @allisterheath