In the aftermath of the The Bank of England (BoE) raising
its key interest rate by a quarter point to 4.25 percent
there has been renewed speculation of an imminent collapse
of Britain's booming property market. This was the third
rate rise since November 2003, and was also widely expected
after recent figures indicated Britain's spending boom showed
no sign of cooling.
Analysts also warned on Thursday that further rate rises
were on the way with the BoE's base rate expected to be
4.75 percent by the end of the year.
Although inflation figures have been on or below Government
targets in recent times, the BoE said that it expected inflationary
pressures to build throughout the year on the back of strong
manufacturing data, increased consumer spending, and the
bouyant housing market.
"Retail spending continues to be robust, underpinned
by income growth and unexpectedly strong house price inflation,"
the BoE said in a statement.
Following on from Tony Dye's comments reported in the press
on 13 April 2004, a great deal of attention is now focussed
on whether prices are sustainable at current levels.
Mortgage Payments Ratio
“It is our view that they are not. While affordability
(in terms of the ratio of mortgage payments to income) remains
at reasonable levels, many households are vulnerable to
the increases in base rates that are expected this year.”
This raises the spectre of mass repossessions not seen in
the UK since the collapse of the early nineties.
**For mortgages, loans and professional financial advice
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So what are the predictions for the future and what is
guiding these negative views?
A number of commentators (such as Hometrack's John Wrigglesworth)
have recently suggested that a fall in prices could be averted
if lenders were willing to relax their lending criteria
(especially their loan to income criteria).
House prices to fall?
Financial analysts, Capital Economics predict that house
prices will rise by 6% in 2004, but will fall back by 2%
at the end of 2004.
A 20% correction in house prices is expected to take three
years. House prices will peak in mid-2004 and then trough
in mid-2007.
British house prices are set to crash, according to Tony
Dye, the London fund manager who earned the nickname "Dr
Doom" after he predicted a collapse in global stock
markets in the 1990s. (As quoted in the Financial Times
on 12/04/04).
Dye was quoted as saying he expects a 30 percent drop in
London house prices in real terms over the next five years.
He added that a similar drop in prices across the nation
would not come as a surprise.
There have been years of house price inflation of 20 percent
or more and the latest figures from the Halifax, the nation's
largest mortgage
lender, showed price rises accelerating again in March toward
that rate after a pause late last year.
Running contrary to these dire predictions there are real
structural factors that suggest a continuation of the current
trend.
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The London Evening Standard reported that house builders
had dismissed Mr Dye's dire forecast. They remained "bullish
about a boom for several years to come", said James
Rossiter. (The Guardian).
Housing Market Factors
"Importantly, builders believe, and economists recognise,
that there is a chronic shortage in the nation's housing
supply which should continue to fuel demand for homes."
Add to this the widely predicted in-flux of immigrant labour
in key areas of the job market from the expanded European
Union, and we have a classic supply & demand argument
for believing that the housing boom has some way to go.
Jeremy Warner at the Independent concurred with Mr Dye's
belief that "the housing market has become a speculative
bubble and must therefore inevitably correct". But
wondered just what might puncture the bubble? "Right
now it is admittedly quite hard to know what the giant pricking
pin might be," he said. "My own view is that there
is a good deal more inflationary pressure building up in
the world economy than the 'experts' think, and that eventually
this will require rather steeper interest rate rises than
generally anticipated. Money has been too cheap and too
plentiful for too long."
So how should the man or woman in the street respond?
Interest rate movements will affect your credit card, mortgage,
loans and banking accounts. Many people make the mistake
of waiting until rates have been increased before shopping
around for a better deal. Why not start now and get your
finances in better shape. Here are 5 key areas where you,
like most other people, may not be making the most of what
is available on the market and where massive savings could
be made simply by speaking to the right people.
1. Mortgages
2. Loans
3. Credit Cards
4. Current accounts
5. Savings accounts
It is a good idea to speak to an Independent Financial
Advisor who can asses the market for you and very likely
save you pounds or give you some protection from rising
rates interest rates. The main thing is to be more pro-active
and not to take the traditional path straight to your bank
for all your financial needs. You do not have to do it all
yourself as there are independent professionals you can
consult.
**For mortgages, loans and professional financial advice
contact Herts and Essex
Conclusion
“Dr Doom” says that predictions of a "soft
landing" for the housing market, consisting of a gentle
slow-down in price rises, ran contrary to the performance
of markets over the last 35 years.
"People seem to believe that property prices can only
rise but that is contrary to the cyclical nature of these
things. When there has been a rise of this scale it is not
followed by a soft landing." This is however, exactly
what the Bank of England are attempting to engineer with
pre-emptive anti-inflationary interest rates increases.
As the Daily Telegraph stated in a recent leader "The
longer the boom goes on, the more likely a crash becomes…
That would have serious economic and political consequences
and the Bank would be foolish to think it could somehow
avoid any of the blame. It should therefore act pre-emptively
and raise interest rates next month. With monetary policy,
a stitch in time saves nine."
Perhaps we should end with Mervyn King's wise words when
asked for a headline by the Treasury Select Committee in
March 2004:
"Think before you borrow, says boring banker"
S Jordan 17th May 2004
For mortgages, loans and professional financial advice
contact Herts and Essex on: 01582 412985
