Commentary: A house of cards built on a rock

For two of our strongest financial institutions to be pleading for government intervention in the housing market smacks of real desperation. If National Westminster and Abbey National, never previously known for unsolicited advice on matters of economic policy, are this worried about house prices, how must the country's other lenders be feeling?

The Building Societies Commission, which regulates the societies, says their average solvency ratio - broadly their accumulated surpluses as a proportion of their total assets, including mortgage lending - was just under 12 per cent at the end of 1991. The minimum set out in the EC directives is 8 per cent. The Commission therefore calculates they would have to lose a third of existing reserves and not raise any new capital to breach the rules en masse.

But societies bolster reserves through profits, and these are under attack. House price falls themselves do not affect societies' underlying financial strength, but some of the consequences of falling prices do. The societies, for example, are hit when they sell repossessed homes at a loss. House price falls also encourage homeowners to walk away from debts which outstrip the value of their property: loans on which interest is no

longer paid are valueless, reducing the societies' capital. But the housing market would have to melt down before the building societies' local difficulty turned into a disaster along the lines of the savings and loans (S&L) crisis in the United States. The problems of the S&Ls were largely rooted in having lent at fixed interest rates, even though they had to raise funds at variable rates, which then rose sharply. Many also invested directly in property whose value plunged.

John Wriglesworth, building society analyst at UBS Phillips & Drew, calculates that even if bad debt provisions among the 20 largest societies increased by 200 per cent this year - which would be consistent with a 20 per cent drop in house prices - most societies will still be more than adequately capitalised. He believes that some may have difficulty if house prices fell another 20 per cent.

It is worth remembering that while prices in some areas of the country have fallen by a third in the past three years, the average fall, according to Nationwide Building Society's house price index, has been a little over 16 per cent

since the 1989 peak. So the solvency of lenders is unlikely to be the trigger for government action.

Britain's financial institutions are still relatively robust.

The real argument for a housing package remains macro-economic: without some return of confidence, it is hard to see a general recovery getting under way.