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House Prices and Interest Rates Hit The Headlines Again

House prices and interest rates are in the news once more.

Once again, house prices and interest rates are the main points of discussion in financial circles this week and, as usual, there seems to be precious little in terms of consensus amongst analysts in relation to these two subjects.

House Prices

A recently released report by the Office for National Statistics showed that national average house prices have risen to above the levels they occupied before the financial crisis, thus surpassing what many consider to be a dangerous threshold. Furthermore, according to a report released yesterday by Nationwide, house prices are still rising rapidly, despite measures introduced by the Bank of England to cool the market.

According to the Office for National Statistics, average London house prices are now 31.6% higher than they were before 2007, while national prices are 6.5% higher than before the financial crisis hit. The average property in the UK now costs £188, 903, compared to over £400, 000 in London. However, what is perhaps more worrying than average house prices themselves, is the level at which they are rising.

National prices went up by 11.8% in the twelve months to June, compared to 11.1% in May. This constitutes the biggest jump in annual prices since 2005. As always, London tells an even more dramatic  tale. House prices in the capital have gone up by a staggering 25.8% in the past year.

Though house buyers in the rest of the country are not paying a quarter more to buy houses than they were last year, this is not an entirely Londoncentric concern.

Deputy Governor for Financial Stability at the Bank of England, Jon Cunliffe, said yesterday that:

“There are specific issues about London, but this is not just a London problem. This is not just a London issue. In the country as a whole over the last year, prices have gone up by over 10%.”

Other places that are performing above the national average include Cambridge, where average prices increased by a fifth over the past year, and St Albans, not far behind with an annual rise of 18%.

However, though house prices are rising ubiquitously across the entire country, not everywhere is performing as well. For instance, prices in Newcastle went up by a comparatively modest rate of 3% over the past twelve months. Having said that, rises of 14% in Southern Scotland, 12% in South West Wales and 8.4% in notoriously poor performing Northern Ireland, where average house prices are still 49.6% lower than they were in 2007, indicate that the continual increase in property prices can no longer be attributed to nothing more than an overspill from the red-hot London and South East markets, but must be viewed as indicative of a nationwide phenomenon.

Okay. So prices are rising and they are currently above the levels at which they stood in 2007 before the market crashed. No-one is disputing these two facts. Yet that is essentially where the consensus ends. Everyone agrees on the facts, but virtually nobody can agree on how these facts should be interpreted and there is even less concurrence on what should be done next.

Financial Policy

Some commentators believe that recent measures introduced by the Bank of England, while not directly influencing house prices as yet, will serve to cool the market soon; while other economists believe that the effect of these measures has already trickled through in the form of reductions in market confidence and a correlative increase in house buyer shrewdness; and others believe the market will simply correct itself.

James Hall, director of London estate agents Fishneedwater said:

“There are already signs that buyers are starting to say enough is enough. Whereas a few months ago, buyers were offering silly prices on some very average properties, the silly season in the capital seems to have passed. Buyers are now taking their time, and making fair offers. We are definitely seeing fewer properties going for or over asking price.”

According to Paul Smith from Haart estate agents:

“It is worrying and abundantly clear that annual price rises of 26 per cent in London are unsustainable but this is different from saying it is a bubble. Bubbles burst and London house prices – while completely unaffordable to many – are not about to collapse. That said, the market is correcting as wages are in no way keeping up with property rises in the capital.”

So no need to worry? At least not if you live in the capital. House prices are slowing and this is perhaps due to the fact that mortgage approvals are down for the fourth consecutive month, thanks in large part to the Mortgage Market Restrictions introduced by the Bank of England. Or perhaps it’s because house prices, having risen so high that wages could not keep up, have begun to correct themselves.

Or perhaps it’s neither.

Governor of the Bank of England Mark Carney said recently that the new MMR rules and other prohibitive measures, including potential stress tests on prospective borrowers and the planned limiting of loans at 4.5 or more times borrowers incomes to 15% of lender’s overall liability, will not ‘bite’ until next year.

However, some financial experts are questioning whether they will bite at all.

The Nationwide’s chief executive Robert Gardener appears to be firmly in the latter camp:

“Most major lenders are already using a stress rate in their affordability calculation… similarly, the proportion of house purchase loans at or above 4.5 times borrowers’ income is currently some way below the 15% cap.”

The figures support Mr Gardner’s assertions. People buying houses with mortgages of more than 4.5 times their annual income currently represents 10% of borrowers nationwide, though this figure rises to 20% when only London is considered.

So is Bank of England policy likely to have any effect on the housing market? The short answer, according to Mr Cunliffe, is no. He admitted yesterday that the Bank ‘can’t control the housing market’, but can only work to ensure the situation is not compounded by high levels of household debt.

What about the possibility that the market will correct itself as a result of the growing disparity between house prices and wages?

Well, considering the fact that a significant section of the London property boom is being fuelled by foreign all-cash investors who are usually wealthy enough to be undeterred by the present strength of sterling, it seems somewhat unlikely. The seemingly endless influx of overseas wealth into London is serving to price many indigenous buyers, reliant on borrowing to finance property acquisition, out of the housing market in the capital. House price increases in areas such as St Albans and Cambridge show that, these Londoners are having to look further afield to acquire property.

However, as noted above, given the countrywide nature of the rapidly rising house price phenomenon, this property overspill can only be viewed as a single factor of a larger, multifaceted paradigm.

But is it something about which we should be worried? Again, consensus on this subject is hard to find.

Fathom Consulting economist Philip Lachowycz is in the batten down the hatches camp. According to Mr Lachowycz, house prices are a major source of concern. He points out that house prices are not rising from cheap base, but instead from a position by which the house price to wages ratio is was already above historically average levels. While accepting that household debt is lower than it was in 2008, Mr Lachowycz calls attention to the fact that it is still 30% higher than in the late 1980s.

Average UK house prices currently stand at 5.7 times average wages, which is lower than in 2007, when the figure stood at 6.4, but still remains significantly higher than anything approaching a golden ratio. It is also worth noting that in London, the epicentre of the property boom, average house prices are a worrying 8.8 times higher than the average income of first-time buyers.

These circumstances seem worryingly close to the potential problem threshold Mr Cunliffe referred to yesterday when he told the BBC that:

“As house prices go up faster than the amount people earn, the only way people can buy is to take on mortgages at higher and higher rates compared to what they earn and then debt goes up and that leaves the economy quite vulnerable to shocks. What we must try and do is to stop that pressure on house prices leading to higher mortgages relative to what people are earning.”

But how is this pressure to be relieved? Rob Wood, chief UK economist at Berenberg, has a suggestion:

“The data signals a rapidly growing economy, one in which house prices are rising very rapidly, employment is rising very rapidly… and interest rates right now are at a record low. I think those sort of indicators mean that it would be sensible to begin the process of gradually withdrawing the exceptional monetary stimulus this year.”

Interest Rates

And there it is. The highly conjectured upon matter of interest rate rises. Will they rise? When? By how much? These seem to be questions by which the markets are extremely preoccupied and, according to Independent Financial Analyst Lior Alkalay, therein lies the problem.

According to Mr Alkalay, the markets crave cohesion and surety and the sooner a decision is made and interest rates rise the better. The longer the Bank delays raising the base rate of interest, the more uncertainty is created in the markets and the higher the yield curve for the UK rate increases and the more serious potential problems will be in the future – at least according to Alkalay. As he puts it: “raise interest rates now to avoid risk later.”

Simple huh? Not quite. While the markets may be craving a rise in interest rates, many home-owners certainly aren’t, especially those who are already overstretched (for more information on the effect interest rate rises will have on the most vulnerable home-owners, see the National Homebuyers article ‘The Cost of Interest Rate Rises‘). As Mr Cunliffe said yesterday, interest rate rises are an effective, but very blunt means of reducing risk to the economy.

However, Mr Cunliffe’s colleague at the Bank of England, Governor Mark Carney, appears to be of a different opinion. Mr Carney continues to drop extremely heavy hints that interest rates will rise this year. He also said last week that they would most likely rise to around 2.5 – the new normal – by 2017.

Carney definitely said that but, according to Jon Cunliffe, that’s not what he said. Confused? Well don’t worry, it’s all very simple. According to Mr Cunliffe, Mr Carney wasn’t talking about the level rates would go to, but instead “the level to which the markets were now predicting interest rates would go.”

Well that’s cleared that up then. So what was outgoing Deputy Governor Charlie Bean referring to when he told Sky News on Sunday that rates were likely to rise to their historically average level of 5% in the foreseeable future?

At least everyone at the Bank is in agreement on the fact that interest rates need to rise, aren’t they? Well, actually, no they’re not.

Speaking at a Financial Times sponsored panel discussion on financial market risks this week Andy Haldane, the Bank of England’s chief economist, said that interest rate rises were not “a first line of defence but sometimes a last line of defence.” Mr Haldane went on to say that there was “precious little sign” of the types of market pressures that would necessitate a rise in interest rates.

So, there’s very little in the way of consensus on economic policy, but are there any reliable answers?

Answers

Unfortunately, the only reliable answer is that there are precious few reliable answers.

One answer is in response to the questions surrounding the emerging trends which have caused the housing market to overheat less as of late, if not cool entirely.

Generally, though not ubiquitously, there is more stock coming onto the market, causing there to be slightly less of a gap between supply and demand. According to the Agency Express Property Activity Index, there was a 21.9% increase in new property listings across the country in June and in London, where all of the market enigmas seem to be crystallized, new listings have gone up by an incredible 84.5%.

Furthermore, the CPIS Purchasing Manager Index rose to 62.6 in June, from 60.0 in May. This basically means that the construction industry is growing again. This is reinforced by the fact that hiring rates in the sector currently stand at their highest level since 1997.

In short, the construction of new homes and the amount of properties entering the market have both increased. The fact that the effect of this on the economy has so far been minimal is a reliable indicator that neither factor has increased by anything approaching the amount they must do before the market can begin to balance itself out.

The one thing that does seem to unite the opinion of every economic commentator is that Britain is not building anywhere enough houses, and the one thing upon which everyone at the Bank of England seems able to agree is that there is nothing they can do about it.

Given all of this, it is very hard to know to whom you should listen. In a nutshell, the only advice that seems worth taking is to ensure all of your economic ducks are in a row – make sure your mortgage is affordable no matter how high interest rates rise, ensure you are not vulnerable to financial shocks by making sure your mortgage will remain affordable when (and it is when, not if) interest rates rise – expect the worst and hope for the best.

Beyond that, your guess may well be as good as theirs.

Should you find yourself needing to sell your home, for whatever reason, National Homebuyers can help. We are the market leading fast purchase property company and we buy houses direct, for cash and in a time-scale that suits our customers. Therefore, selling property to us is always chain, stress and hassle free. What’s more, we are a guaranteed cash buyer, so, following a fast, detailed and no obligation valuation, we guarantee to make a genuine cash offer to buy your house. We buy any house, regardless of condition or location and irrespective of your reason for selling; even if you wish to sell your house fast to avoid all the problems that may arise from the confusion that currently pervades amongst financial policy makers.

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