It's too late to stop the housing crash

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The Bank of England is set to decide on interest rates this Thursday.

It should be one of the most lively meetings they've had recently. Governor Mervyn King is clearly still trying to fight the good fight against inflation. And with oil prices still near $100 a barrel, who can blame him?

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But others are getting edgy. David Blanchflower wants a cut (as always), but so does Sir John Gieve. As Liam Halligan said in this weekend's Telegraph, there's a strong possibility that the governor might be outvoted, and we'll see a December cut.

Not that it'll make any difference to the housing market

At the weekend, the Express, ever the master of understatement, ran the headline "100 days to halt housing crash". Ray Boulger of mortgage broker John Charcol warns that if the bank doesn't start cutting rates by February, "any small early-year blip could spiral into a full-blown property crash."

This of course is a crafty bit of damage limitation by property pundits put the wind up people now and hopefully if the bank does cut rates, they'll be able to say "Phew, it's all going to be OK now."

But it won't be.

Some of you might be wondering but why not? After all, a rate cut in August 2005 put paid to the property slump then.

However, the situation now is entirely different. In the slowdown of mid-2004 / 2005, even although base rates had risen, mortgage lending hadn't really tightened up much. Banks and building societies were more than happy to lend and the wholesale markets were more than willing to fund them. So they relaxed lending criteria to offset higher base rates extending loan periods, pushing more interest-only loans, relaxing deposit criteria (for buy-to-let particularly) anything to help those buyers "get a foot on the ladder", or to extend their property empires that bit further.

But now that key source of funding, the wholesale markets, has dried up. Over and above this, banks are scared that their balance sheets are now playing host to a whole series of skeletons just waiting to erupt from the closet. The last thing they want to do is lend any more money recklessly they might need it themselves.

So they're making it harder, and more expensive for people to borrow. Research from Moneyfacts shows that the sub-prime buy-to-let market has been "virtually destroyed" by the credit crunch. Since July, the number of products on the market has fallen by 89%. And residential sub-prime has seen a 63% fall over the same period.

Meanwhile, in the "prime" sector, lenders are raising interest charges, even though the Bank of England hasn't changed interest rates. Nationwide building society is raising its two-year tracker rates by 0.15% from tomorrow. The group said "the costs of funding have increased and we have found it necessary to follow other lenders who have recently increased their rates."

As a building society, Nationwide raises most of its money from retail deposits, so it's not as exposed to the wholesale markets as its banking rivals. But with savings rates being jacked up to attract more business from savers, the focus of financial competition has moved from seeing who can lend at the lowest rate, to who can offer the highest interest rates to savers. And when it comes to mortgages, the banking sector's priority now is profit, not market share.

As lending dries up, the housing market has to suffer. It's not just us that think so this morning's Telegraph quotes from a report by Morgan Stanley's UK equity team. "The financial crisis is curtailing banks' lending volumes and will have a serious impact on growth. Given the precarious position of many balance sheets, we do not think that there is any quick fix." The group reckons that "house prices will fall 10% next year, with the possibility of further declines into 2009."

One hundred days to halt the housing crash? I'm afraid it's way too late for that.

Turning to the wider markets

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London market close: FTSE 100 - 6,432.5 (+83.4)

European markets: ParisCAC-40 - 5,670.57 (+72.46); German DAX-30 - 7,870.52 (+105.33).

US markets: Dow Jones Industrial Average - 13,371.72 (+59.99); S&P 500 - 1,481.14 (+11.42); Nasdaq - 2,660.96 (-7.17).

Asiamarkets: Japanese Nikkei - 15,628.97 (-51.70); Hang Seng - 28,658.42 (+14.81).

Crude oil - $88.18. Brent spot - $88.71.

Gold - $789.700. Silver - $14.095.

Currencies: pound/dollar: 2.0621; pound/euro: 1.4066; dollar/euro: 0.6819; dollar/yen: 110.4000.

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