January 2007
Over the past few years we have been exercised
by the performance of the UK housing market, where housing
prices generally are reported as rising at an annualised
rate of 8.4% - the fastest growth for over 2 years and seemingly
unfettered by two interest rate rises. As the Monetary Policy
Committee addresses inflationary problems by the only means
available - each interest rate hike brings the market,
hamstrung by affordability constraints, closer to the brink
and there is very little room to manoeuvre.
The Consumer Price Index now stands at 3% and has now missed
the Treasury’s 2% target for 8 months and at an 11
year high. The Retail Price Index, the benchmark for wage
negotiations, at 4.4% is now at a 15 year high - the
last time it was at these levels, base rate stood at 11%.
The money supply is growing at an unsustainable rate fuelled
by government spending. In this environment interest rates
can only go one way!
When the Central Bank of USA increased interest rates in
2005 to address their inflation problems, a direct consequence
was their current housing slump and we fear that a similar
chain of events will take place in the UK.
The supply of credit and the search for capital growth are
fundamental drivers for property prices and we have started
to see the end of responsible lending. Leading lenders have
extended their maximum lending multiples to 5 or 6 times
income; with 125% mortgages - 95% secured and 30% unsecured
- available for those desperate to get on the escalator or
to trade up. Increased interest rates and a cash strapped
new- buyer market are a problem waiting to happen.
Of concern is the number of inexperienced investors, looking
to make capital gains, who have entered the 'buy-to-let'
market with substantial debt. In some areas as much as 65%
of new
developments are owned by the investing market - but
a thin letting market reduces returns and average yields,
at best, are reported to be about 3.2%. Prospects of capital
growth in the short to medium term look pretty slim.
Potential buyers and investors with insubstantial deposits
should remember that the Bank of England, as directed by the
Monetary Policy Committee, are duty bound to continue raising
interest rates until CPI falls back to the target rate of 2%.
This is not a time for optimism!
If you have any clients who are facing
potential problems, please speak to Jeremy
Priestley on 0114 275 5033.
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