Property peril as prices soar

WITH the Nationwide Building Society today reporting that house prices are rising at 17.9%, it seems almost certain that it must all end in tears. Indeed, if there is one depressing aspect about the British psyche, it is that success in controlling inflation in the past decade has so conspicuously failed to dampen our enthusiasm for paying silly money for houses in the belief that there will always be someone even sillier to sell them to.

Should we be nervous? Deputy Governor of the Bank of England David Clementi said the other day that there was no great need to worry about house prices despite signs that the boom was running out of control, because mortgage interest payments still accounted for only 8% of personal disposable income against 15% just before the 1990 crash. He was, however, quickly reprimanded in a letter to the Financial Times earlier this month from Cambridge economist Professor Wynne Godley - the same Wynne Godley who led the famous economists' revolt against the policies of Margaret Thatcher in a letter to The Times more than 20 years ago.

Godley says first that if inflation is taken into account, the real cost of mortgage payments is pretty well the same now as it was then and second that capital repayments - paying off the loan, not the interest - add another four points to the total cost. Those who say there is nothing to worry about are being dangerously complacent, he says.

Today, most people seem to be siding with Godley in believing that the housing boom could indeed cause problems. Ignoring it as the Bank has seems a bit like US Federal Reserve chairman Alan Greenspan complaining about irrational exuberance in the stock market and then doing nothing to stop the dotcom boom running out of control.

DIY solution

WHILE the British have normally got the better of the French on the battlefield, the roles are reversed when it comes to business. There is something about the French way of running things that we can't quite fathom. At best, British entrepreneurs realise this and steer well clear. At worst, they pretend we are all on the same side then wonder why they get taken to the cleaners.

We provide the expertise and the money to build Concorde and the French end up owning Airbus. We lay an electricity cable under the Channel but the flow of power is always from them to us. British water, transport and electricity utilities are firmly in French hands, but we own none of theirs.

It is the way of the world. Which is why the attempt by B&Q's parent company Kingfisher to take over French DIY chain Castorama seems certain to end in disaster. If Kingfisher wins it will have had to overpay and be left with a business gutted of its management. If it loses, the Castorama board could make it regret its impertinence.

There is still a way out, however. Kingfisher could seek to persuade the French to buy its 55% stake in Castorama rather than try to get hold of the 45% it does not already own. If Kingfisher believes its offer of 67p a share for Castorama is fair - which the French dispute - it could call their bluff by offering to sell them its holding at that price.

Alternatively, it could invite the French to put a higher value on Castorama shares, provided Kingfisher has the right to choose whether it wishes to be a buyer or a seller at the new level. This is unlikely to happen but it is something Kingfisher's non-executive directors should advocate for the sake of Kingfisher shareholders.

The company is in a hole and the first law of holes, as Denis (now Lord) Healey famously said, is to stop digging when you're in one. The current strategy to buy Castorama does not do that - it simply gets Kingfisher's bosses in over their heads.