Leading article: No longer as safe as houses

I t is always unsettling when a business starts turning away new custom, so we should not be surprised that First Direct's decision to stop offering home loans to anyone who is not already a customer has been greeted with some consternation. The bank, part of HSBC, says that the move is temporary, to allow it to cope with the unprecedented demand for its range of mortgages after competitors hiked their own rates. And it stresses that it is not having problems raising funds to finance lending.

After the HBOS episode two weeks ago, it would be irresponsible to speculate about the underlying health of the business. But, whatever the truth, this announcement is part of a clear trend. Bank lending has tightened up considerably of late. Mortgages are becoming more expensive and thousands of products have been withdrawn. In opting to serve existing customers, First Direct has taken the natural next step. Figures released by the Bank of England yesterday show that new mortgage approvals in February were 38 per cent lower that at the same time last year.

One might wonder how this can be given that the Bank of England has cut interest rates twice since last December, something which usually has the effect of bringing down mortgage rates. The answer is that the problem is not the price of money, but its availability. The Bank of England can cut rates all it likes, but it cannot force commercial banks to lend to each other. The banks are still not doing so because they think there is a risk that they will not get their money back.

Despite the massive mortgage holding write downs in recent months, there remains considerable uncertainty in financial markets as to which institutions are holding the toxic US sub-prime mortgage debt. These are still plummeting in value as the American property market sinks still lower. Put simply, for the banks, survival is a higher priority at present than winning new business. As for homeowners, higher mortgage costs and tighter lending conditions will be a strain on many household budgets. In the long term, that is healthy because it will bring down house prices to a more realistic level. We should all be glad,for instance, to see the back of the 125 per cent mortgage.

But there is another danger, namely that a sharp contraction in lending will cause not an orderly correction in prices, but a confidence destroying crash. In those circumstances the first priority of a great many people, like the banks, will not be stable asset prices, but mere economic survival. Avoiding such a scenario, above all others, is what will be on the mind of the directors of the Bank of England and our economic policy makers as they meet to consider what can be done to alleviate this crisis.