ERM 'turning off homes money tap'

THE Government's tough commitment to the exchange rate mechanism, reaffirmed last week by John Major, the Prime Minister, is causing a fundamental shift away from housing as an investment, according to a report today by the PA Consulting Group.

This is a long-term structural change, separate from the cyclical impact of the recession, says the report.

The new regime of low inflation and high real interest rates has 'turned off the cheap money tap' that fuelled post-war housing booms. House prices will remain subdued and turnover will be low because the investment attractions of moving house and gearing up on mortgages will no longer exist. Housing will be a consumption item rather than an investment.

Financial savings have become a more attractive investment than property, and financial institutions will have to switch from being primarily lenders to savings organisations.

And with the end of cheap money, the banks' extensive branch networks will become unsustainable because of the need for higher productivity and cost reductions.

The falling attraction of housing as an investment and the growing number of older people, who save more than the young, will combine to produce a national shift from consumption to savings. Investment in pensions and healthcare will generate a 'major flow of savings'.

Another factor is a Europe- wide erosion of tax concessions to borrowers, which are being replaced by incentives to save, at a time when consumers are also becoming more sophisticated.

The PA report, by Dr John Ginarlis, adds that concerns expressed about the recent rise in the savings ratio 'fail to grasp that it is going to carry on rising - a shift from consumption to savings has taken place that is not going to be reversed'.

The financial services industry requires a radical restructuring to survive in the new environment, he believes. The recession is having the same impact on service industry productivity as the 1980s recession had on manufacturing.

Financial institutions will have to provide investment advisory services to most of their customers of a kind so far available only to the more prosperous.

Dr Ginarlis says: 'Financial services companies have so far just been scratching at the surface of potential productivity gains.'

Saving Housing, Dr John Ginarlis, PA Consulting Group, 123 Buckingham Palace Rd, London SW1W 9SR ( pounds 1,025).