George Mainwaring, on Aug 21 2006, 02:29 PM, said:
We've just had a rate rise rather than the "long predicted" cut and it looks like we may get another before Christmas. This seems to have brought about an "oh shit" moment in the media which may tigger a sharp but (likely) small pull back. The latest Rightmove hypeometer reading may be the first sign of this. If, as might be expected, this sets the snowball in motion, then it will build on itself until the avalanche is finally triggered. And there's a lot more snow up there now.......
Yes, and here's a classic from today's Money Morning.
There were a number of uncharacteristically downbeat pieces on the property market spread across the weekend press.
Since the beginning of the year, the pundits have been itching to proclaim the return of the boom, with prices in London apparently leading the way. So why the sudden change in tone? Well, after this month’s “shock” rise in interest rates, the estate agents are getting edgy.
“If we keep saying that house prices are rising, the Bank of England might hike rates even further,” they imagine to themselves. “And that could - gasp - damage the market.”
To our minds, it is nothing less than rank self-delusion for property pundits to imagine that the rash of half-baked little surveys they churn out will make any difference to the mindset of the Bank’s interest-rate setting committee - which is after all, meant to be targeting inflation, rather than house prices.
But still, you can rarely accuse an estate agent of thinking far beyond their next sale. And surprise, surprise, just as we said would happen last week, the data on the property market has taken a sudden downturn…
Recently-listed property website Rightmove reports that asking prices for houses fell by 1.6% in August, with the annual rate of asking price inflation eased to 9% from 10.6% in July. Director Miles Shipside said “Prices are now cooling off and require no further intervention from the Bank of England.”
We’re sure that Mervyn King will be glad of Mr Shipside’s advice. There may even be a section in the minutes of next month’s meeting where Mr King turns to one of his colleagues and says: “What with inflation running rampant, and consumers up past their eyeballs in debt, I was going to vote for a rate rise. But thankfully, Miles Shipside reminded me that the property bubble might pop if I did. So a 0.5% cut it is.”
Rightmove’s index is at best, a measure of estate agent confidence. It’s taken solely from the asking prices of houses that are new on the market that month. So any houses that have had their price reduced since going on the market are not included.
A far superior asking price survey, from Home.co.uk, covers both new properties and those that have been on the market for some time. According to Home, asking prices fell 0.6% this month, and are down 2.2% for the year as a whole – a markedly different picture to Rightmove.
The truth is, the pundits are right to be worried. One of the more bearish columns came from The Daily Telegraph’s Edmund Conway. “I’m starting to get a little worried about house prices,” he said. “I still don’t think prices will crash, but there’s something in the air that makes me nervous.”
Perhaps Mr Conway had been reading his own newspaper. The personal finance pages contained a ‘financial makeover’ page, running through the balance sheet of a PE teacher and her husband.
The two were in their late twenties, recently married, and had bought a house together. They had a £205,000 two-year fixed-rate mortgage at 4.69%, costing them £890 a month. The trouble is, it was interest-only.
“Once the fixed-rate period is up next year, we would like to try to switch the mortgage to a repayment basis, so that we are paying back some of the capital too.”
Looking at the figures, the experts estimated that if they make the move, with interest rates rising, a 5.5% fixed rate capital repayment mortgage would cost them £1,310 a month. That’s an extra £420 a month they have to find.
If you assume they’re both basic rate taxpayers, that means that to maintain their current standard of living, they will have to earn about an extra £7,600 each year just to pay the mortgage.
That’s by no means impossible for two people at the earlier stages of their careers. But as most of us are aware, one thing that tends to follow marriage is children. And children are expensive and they also have the potential to take a lot of time out of a woman’s working life.
It’s stories like these that are really worrying. This is an ordinary, working couple on slightly-above average earnings – there’s nothing to suggest that they are less financially savvy than the rest of the population. And yet they have taken out an interest-only mortgage, with no plan for paying off the capital, assuming they will be able to make up the slack at some point in the future.
If this is the kind of situation that the average ‘sensible’ couple is getting themselves into, then we should be worried about the housing market. It’s clear that for most people there is no give in the system – if personal disasters strike, or jobs are lost, or interest rates rise much further, their finances will not be able to take it.
We imagine that this is the “something in the air” that’s making The Telegraph’s Mr Conway nervous.