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House price rises in the UK appear to be finally slowing down.
Prices barely rose between June and July, according to the latest figures from the Land Registry, and annual growth slowed from 9.2% to 8.8%.
Even the Nationwide’s index for August showed annual growth slowing to 9.6% from 9.9%.
Of course, a near-double-digit annual rise is still a pretty hefty climb. But it’s hard to imagine that growth will be anywhere near as strong by the end of the year…
Kelvin Davidson of Capital Economics notes that the Land Registry house price figures show that prices have now fallen for two months in a row in the West Midlands, Yorkshire & Humberside, and Wales. “It is almost two years since house prices have fallen in at least three regions for two consecutive months.”
Now two years ago, we were just getting into the house price slowdown of 2004 / early 2005. So that experience alone suggests that the impact of interest rate hikes is just starting to be felt by consumers and we will probably see a further slowdown in the months ahead.
Davidson reckons that “national average annual house price growth” will be “much softer by the end of the year, in the vicinity of 5%.”
But of course, if you remember that earlier slowdown, by mid-2005 house prices were picking up again, with a Bank of England rate cut in 2005 sealing the deal. Prices re-inflated as buyers – but more importantly, lenders – became confident that cheap mortgage deals were sustainable. So what’s to stop that happening again?
In a phrase – the credit crunch. The impact of the US subprime calamity has rattled lenders across the world. It’s driven up the cost of borrowing money for everyone from banks to hedge funds to subprime borrowers in the UK. But importantly, even if central bank rates are cut, it’s re-introduced the concept of risk into lenders’ vocabularies.
Lending to high-risk individuals no longer looks like a sure-fire way to make money. Instead, it looks like a sure-fire way to go bankrupt or potentially face being sued, depending on how the regulators end up viewing the whole mis-selling aspect of US subprime.
The coming UK property crash – and how to avoid it
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That means that the cheap money fountain that has sustained the house price boom – and it is cheap money, rather than supply and demand that has been the problem – has now shut down for the foreseeable future. As Gabriel Rozenberg noted in The Times yesterday, “risk has been repriced and institutions are not going to allow cheap credit, as they have done in the past three or four years.”
If people can no longer borrow five to six times their salaries, and if interest rates push up the monthly cost of buying a house – even on an interest-only mortgage – then there really is only one way that prices can go. There is no give in the system – people have been borrowing to their absolute limit to get on the property ladder, or even to move up it. If that limit is reduced, then house prices have to come down.
Another interesting phenomenon pointing to distress in the property market is the huge growth in the sell-to-rent-back phenomenon. There has been an explosion in the number of companies who offer to buy back your property at a discount, enabling you to pay off the mortgage, then rent it back. In recent weeks, I’ve noticed a number of full-page ads promoting these services in the property sections of various local papers.
These companies offer to pay between about 70% and 90% of the market price of a home. Anyone willing to accept that must be pretty desperate, and the massive growth in the sector suggests there’s a lot of desperate people out there.
We’ve got more on the UK housing market and why our subprime sector is much bigger than anyone thinks in the latest issue of MoneyWeek, out on Friday. If you’re not already a subscriber, you can sign up for a three-week free trial by clicking here: Sign up for a three-week free trial of MoneyWeek.
Turning to the wider markets…
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In London, the benchmark FTSE 100 index was given a boost by the strong start on Wall Street and ended the day 30 points higher, at 6,132. Whitbread was the day’s biggest gainer after the leisure stock revealed a 6.6% increase in like-for-like sales in the quarter ending mid-August. For a full market report, see: London market close.
Across the Channel, the major indices recovered from a shaky start to end the day with moderate gains. The Paris CAC-40 was up 45 points to close at 5,520. And, after spending most of the day in the red following the release of data showing that German consumer confidence had fallen for the first time in six months, the Frankfurt DAX-30 closed 8 points higher, at 7,439.
On Wall Street, US stocks were sharply higher yesterday as bargain hunters piled into oversold shares. The Dow Jones rallied 247 points to end the day at 13,289, with Intel and General Motors making gains of nearly 5%. The tech-heavy Nasdaq added 62 points to close at 2,563, and the S&P 500 was up 31 points, at 1,463.
In Asia, the Nikkei had risen 140 points to 16,153 today and the Hang Seng was up 463 points to 23,484.
Crude oil futures reached their highest level in three weeks yesterday on falling gasoline supplies and had continued to climb – to as high as $73.73 – today. In London, Brent spot was at $71.30.
Spot gold had dipped to $665.30 this morning, following yesterday’s $3 jump, and silver was steady at $11.84.
In the currency markets, sterling dropped three-quarters of a point against the Japanese yen as investors abandoned high-yielding currencies in favour of low-yielding ones. The pound was last at 2.2369 against the yen and was also down against the dollar, at $2.0099, and little-changed against the euro at 1.4742. And the dollar was at 0.7332 against the euro and 115.41 against the Japanese yen.
And in London this morning, brewing giant Diageo announced a 22% fall in annual profits, although last year’s results had been boosted by one-off asset sales and tax credits. The company revised forecasts for underlying operating profits for this year up to 9%. Shares had risen 0.2% in early trading.
And our recommended articles for today…
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