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“7% rise in value of your home” screamed the Daily Express’s front page yesterday. “A booming market sends prices spiralling upwards and it will get even better”.
As a headline, it made a change from the latest conspiracy theories about Princess Diana. But it’s no less far-fetched.
So what are they on about? Well, the paper was referring to the news that the Council of Mortgage Lenders now reckons house prices will rise by 7% this year, not 2% as it had previously thought.
According to the Express “there seems to be no end in sight to the new boom”.
In that case, they can’t have seen the latest house price figures from the Halifax…
The latest news on house prices suggests that the market is continuing to slow after its brief springtime rally. Halifax reported that house prices rose by just 0.1% last month, compared to April. The annual rate of growth rose to 9.1%, but that was largely because “the corresponding figures last year were weak” – house prices fell by 0.6% last May.
And yet, earlier this week, the Council of Mortgage Lenders confidently predicted that the boom would continue, with house prices set to rise by 7% this year, rather than the 2% previously expected.
The CML acknowledges that interest rates are likely to rise – it predicts that the base rate will be 4.75% by the year’s end. And it also accepts that this will mean higher numbers of repossessions – in fact it expects the number of homeowners who lose their house to jump nearly 50%, to 15,000 this year.
And yet the CML and estate agents are being dismissive about the impact of higher interest rates. “While the occasional tweak may be necessary, wholesale rises of two and three per cent are simply not on the cards,” said Peter Bolton King of the National Association of Estate Agents.
Mr Bolton King seems to have forgotten that the only thing that saved the housing market from full-scale price falls in 2005 was last August’s quarter-point cut in interest rates. If a 0.25% trim can push the market higher, it seems to make sense that a quarter-point hike will push it back down.
And as Kelvin Davidson at Capital Economics points out, all this talk of further UK interest rate hikes “is also likely, at the margins, to dampen housing market sentiment.”
On top of that, as Halifax states: “substantial increases in utility bills and above-inflation council tax rises are also putting pressure on householders’ finances.’
But of course, it adds the usual property bull disclaimer, that “sound fundamentals will keep the housing market in good shape.”
What are these sound fundamentals exactly? “A strengthening economy, high levels of employment and low interest rates.”
But the reality is that unemployment is rising; interest rates look set to rise too; and the assertion that the economy is strengthening is debatable at the very least.
Consumer spending remains wobbly (despite the recent surge in TV sales), and the latest figures show that the manufacturing sector is nowhere near strong enough to pick up the slack from the over-indebted consumer. Manufacturing output fell by 0.2% in April, the worst fall in more than six months and a much weaker reading than analysts had expected.
Anyway, although the Bank of England voted for a rate freeze this month, estate agents and potential buyers shouldn’t feel too confident about its future intentions. It wasn’t so long ago that the majority of commentators were expecting a cut, not a hike.
After years of predictability, central banks now seem to have developed a nasty habit of springing surprises. US Federal Reserve chief Ben Bernanke’s focus on inflation has shaken up complacent investors badly, and has been held largely responsible for recent stock market chaos.
But Mr Bernanke’s not the only one springing surprises. South Korea’s central bank wrong-footed analysts with another 0.25% hike in interest rates yesterday, taking them to 4.25%, a three-year high.
Meanwhile, South Africa’s central bank shocked analysts with a 0.5% hike, the first rise since September 2002, taking the base rate to 7.5%. This week has also seen rate hikes in Turkey, India, and Thailand.
And of course, the European Central Bank has now raised eurozone interest rates to 2.75%. No surprises there – but like it or not, if house prices are as sensitive to interest rates as the past decade has shown, then the end of cheap money means there’s only one place for them to go. Down.
If you’re thinking of overstretching yourself to get on the property ladder, then you should read MoneyWeek’s Jody Clarke on the perils facing desperate first-time buyers. Subscribers can read his report from last week’s magazine online here: First-time buyers – beware of dodgy shortcuts
And if you’re not a subscriber yet, you can get access to all the content on the MoneyWeek website and sign up for a three-week free trial of the magazine, just by clicking here: Sign up for a three-week free trial of MoneyWeek.
Turning to the stock markets…
The FTSE 100 ended down 143 points at 5,562. Miners were the worst performers, with all the majors falling by at least 6%. BHP Billiton shed 7% to 935.5p, while Anglo American slid 7% to £18.45. For a full market report, see: London market close
Over in continental Europe, the Paris Cac 40 fell 140 points to 4,684, while the German Dax fell 160 to close at 5,383.
Across the Atlantic, stocks ended mixed, as the Dow Jones managed to stage a last-minute rally after spending much of the day in the red. The Dow Jones Industrial Average rose 7 points to 10,938, while the S&P 500 gained 1 point to 1,257. But the tech-heavy Nasdaq fell for the fifth session in a row, shedding 6 to 2,145.
Over in Asia, the Nikkei 225 managed to reclaim some territory, rising 117 points to 14,750 after a rollercoaster session. Stocks were helped by a report showing that machinery orders rose by 10.8% in April, more than three times what analysts had been expecting. The Nikkei has lost 6.6% this week, its biggest weekly fall since March 2001.
This morning, oil was lower in New York, trading at around $70.10 a barrel. Brent crude was also down, trading at around $67.50.
Meanwhile, spot gold fell to its lowest price in nearly two months, trading as low as $607.10 an ounce as the dollar strengthened, while silver traded at around $11.12 an ounce.
And here in the UK, the FTSE 100 has staged something of a rebound, with mining stocks rallying after yesterday’s severe losses.
And our two recommended articles for today…
What has held commodities back for the past 200 years?
– Those who believe the commodities bubble has burst point to the fact that commodities have been falling in value, in real terms, for the past 200 years. Dr Marc Faber has a great deal of sympathy for this view – but as he writes in The Daily Reckoning, a number of factors suggest that this two-century underperformance could be at an end. To find out why the new commodity bull could have a long way to run yet, see: What has held commodities back for the past 200 years?
How risk aversion could threaten the global economy
– We don’t always agree with Morgan Stanley’s Stephen Roach – but his opinions are certainly worth listening to. Widespread falls across all asset classes show that investors are rapidly losing their appetite for risk. Is there any reason for this – or does it just prove that bubbles are perfectly capable of bursting under their own weight? To find out, and to find out which asset classes he believes are most vulnerable to this sudden bout of risk aversion, see: How risk aversion could threaten the global economy