the times | Tuesday September 15 2020 1GM 37

Business

The Lloyds share

price appears to

signal considerable pain

ahead for households

S

ocial capital — the trust,

relationships and community

that bind people together —

is a slippery economic

construct. It’s hard to grasp,

not like the tangible capital of a car,

intangible capital of a patent or even

the human capital of skills. For

Raghuram Rajan, the former chief

economist of the International

Monetary Fund, it is the neglected

“third pillar” of modern economies,

the glue that gives the other two,

markets and the state, permission to

shape democratic society.

Since the coronavirus arrived, that

glue has been stronger than ever.

You can see it in compliance with

social distancing rules and the

750,000 NHS volunteers. You can see

it in the people who delivered food to

their locked-down neighbours and

the children who kept in touch with

their isolated grandparents. Think of

it as dinner with a friend. You can

measure the value of the food and

drink by the price, but there is no

price for the conversation, which is

the whole reason you are there.

Because social capital is hard to

measure, we take it for granted. The

pandemic has shown us we ought not

to.

Proof of its value can be found in

the most unlikely of places. The

mafia in Italy, the yakuza in Japan

and the gangs of Brazil have used the

crisis to build up their social capital.

Mafiosos in Sicily offered food

parcels to the needy. It was an old

tactic, Nicola Gratteri, an anti-mafia

investigator in Calabria, told the

BBC. “The aim is to gain credibility

and to step in as an alternative to the

state.”

The yakuza tried something

similar in Japan, handing out free

food, consumer goods and medical

supplies “to become more socially

accepted”, Garyo Okita, a journalist

and expert on the crime syndicates,

said. In Rio’s favelas, gangs

transformed themselves into social-

distancing militias. “Whoever is

caught on the street will learn how to

respect the measure. We want the

best for the population. If the

government is unable to manage,

organised crime resolves,” one

message seen by the Financial Times

read.

Of course, the gangsters were not

being benevolent. The dividend on

their social capital will be paid in

favours and requests. But at least

they recognise there is a value.

Downing Street doesn’t seem to be

quite so switched on.

A study of the pandemic’s

psychological and social effects on

70,000 adults by University College

London found that initially public

trust in the government was high.

But it tumbled when the crisis in

care homes emerged in May as

Britain rocketed up the fatalities

leaderboard. It fell again after the

prime minister defended Dominic

Cummings’ rule-breaking jaunt to

Barnard Castle.

By burning through his social

capital, Boris Johnson is bucking the

trend. Trust in the Welsh and

Scottish governments has risen and

the public is rediscovering the value

of community. According to the UCL

study, the most common behavioural

change planned is “increasing

support for local businesses”. There

also has been a rise in volunteering.

This resurgence of community

cohesion, after the divisions of

Brexit, identity politics and culture

wars — all amplified for dollars by

social media — has been a rare

bright spot in the pandemic. Social

capital was plummeting. Trust in

government fell by eleven percentage

points last year, engagement with

neighbours had dropped by seven

percentage points since 2012 and the

sense of belonging was in decline,

according to experimental measures

from the Office for National

Statistics. Social media, it showed,

had stolen our attention.

Social capital has helped us

through big moments of change in

the past. It delivered the charitable

sector from the Industrial

Revolution, the Blitz spirit in the

Second World War and the welfare

state afterwards. Hard to measure it

may be, but it’s invaluable and we

need it now.

Philip Aldrick

Something doesn’t

seem to tally. On the

one hand, the share

price of Lloyds

Banking Group,

Britain’s biggest mortgage lender by a

country mile, is on the floor because

investors are so worried about a

possible surge in defaults and loan

losses. On the other, estate agents

have got smiles on their faces and are

talking about a “mini-boom” in

housing.

They can’t both be right, can they?

The Lloyds share price decline is

remarkable. Languishing below 26p at

one point yesterday, the “Black Horse”

bank has disappeared through the

barn floor. For most of the past five

years, it has been at more than double

this level — mostly bobbing around

50p to 70p. Even in the depths of the

banking crisis in March 2009, the

shares never fell as low as 26p.

One immediate observation is that,

with the benefit of hindsight, ministers

who extricated taxpayers from Lloyds

at an average exit price of 61p look

rather clever now. The government

lost between £3.2 billion and

£5.9 billion from the rescue, according

to the National Audit Office, but

would be facing far, far higher losses if

it were still invested in the bank today.

The gloom over Lloyds — and other

banks — is not merely over personal

borrowers defaulting on mortgages. It

also has a large business banking unit,

which is vulnerable to a protracted

recession. Like all banks, its margins

are being squeezed by the pushing of

official interest rates close to zero.

And with 97 per cent of its revenues

earned in the UK, it is seen as a

bellwether for the domestic economy

— and a classic way for speculators

who see the European Union trade

deal brinkmanship as turning even

uglier in the coming weeks to take a

down bet on the UK.

Yet it is still the gigantic

home loan book that

dominates at Lloyds

and its Halifax

offshoot and

inevitably makes it

sensitive to

housing market

gloom or cheer. It

has £267 billion of

outstanding home loans. While most

of the book is solid, there is a

substantial tail of struggling

borrowers: 37,000 were more than

three months in arrears on £4.6 billion

of loans at the end of June, while

472,000 mortgage borrowers were

sufficiently stretched to ask for a

payment holiday. At the half-year, it

lifted its provision for mortgage bad

debts 16-fold to £603 million.

The slide in Lloyds’ share price is

signalling the perceived risk of

considerable pain ahead, with

unemployment going up, leading to

defaults, repossessions, fire sales and

the inevitable hit to house prices,

never mind losses on unsecured debt

and business loans.

At the same time, though, almost

every housing market indicator has

been pointing upwards. Prices hit

record highs last month, according to

both the Nationwide and Halifax

indices. The Royal Institution of

Chartered Surveyors said last week

that prices have been rising at their

fastest pace for four years. Mortgage

approvals, the main fuel for the

market, rose strongly in July,

according to Bank of England data.

The pent-up demand theory doesn’t

fully explain this. Buyers scrambling

to buy after the lockdown hiatus

surely should have been roughly

cancelled out by sellers scrambling to

sell. It’s not implausible that

something more structural is

happening, too. Working from home

and going out less will have made

some of us value our homes more and

made us prepared to pay a bit more

for them.

It’s also surely right that the

unprecedented spate of money-

printing by the Bank of England is

pushing down yields across the board

and propping up asset prices. The buy-

to-let landlord who in the past

required a net yield of at least

4 per cent might

nowadays be content to

hold property offering

only 3 per cent.

That’s still an awful

lot higher than

risk-free ten-year

gilts, which are

yielding 0.18 per

cent at the

moment.

It is too early to be

certain of much.

Demand for out-of-

town places with gardens

may have rocketed, but people trying

to sell London flats, say, report no

buyer interest at all. No one knows for

sure how quickly the government will

withdraw the stimuli that have

propped up both the economy and the

housing market. The most immediate

crunch date is the end of furloughing

on October 31, of course. That’s also

when the moratorium on payment

holidays and repossessions is due to

end. Another cliff-edge hoves into

view with temporary stamp duty

concessions due to end on March 31

next year.

The Centre for Economics and

Business Research popped some of

the recent cheeriness in the housing

market with its forecast yesterday that

house prices will fall by about 14 per

cent next year as these measures are

withdrawn. It also argued that the

recent bullish data were being

distorted by a rise in transactions by

the better-off, who have been barely

affected by the pandemic.

Its prediction is not that extreme.

The peak-to-trough fall in UK house

prices was 19 per cent in 2007 to 2009;

in Spain, prices fell by 35 per cent in

the eurozone crisis, in Greece by

40 per cent. The Bank of England’s

stress tests require British banks to

contemplate a 33 per cent slide.

Lloyds is not pencilling in anything

nearly as extreme. Although it has

mapped out a “severe scenario”, in

which house prices fall by 30 per cent,

its blended average house price

expectation — the basis for the cash it

has already set aside in expectation of

defaults — is for a manageable 6.1 per

cent decline over three years.

The money-creating machinery in

Threadneedle Street is already having

a huge impact on what investors

regard as a tolerable return for their

money. It has helped to restore share

values after the March crash, despite a

sharp fall in dividend expectations,

and it may well be doing something

similar in the residential property

market. That — and a greater appeal

of home ownership in lockdown —

may be enough to explain property’s

appeal and resilience so far. But the

true test is still to come. Cheerful

estate agents today

and a soggy Lloyds

share price are not

as contradictory as

they might appear.

‘‘

’’

Property market boom or Lloyds’ shares

keep falling — which, if either, is right?

Patrick Hosking is Financial Editor

of The Times

Philip Aldrick is Economics Editor of

The Times

The mafia can teach the

prime minister a thing or

two about social capital

Trust in UK government

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Autumn 2004-19

Source: ONS

Patrick Hosking

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