The UK property market is a mess. Even the biggest property bull would have to admit that. I’m not talking about the fact that house prices are falling again (down 1.2% on the year to May, says Nationwide – which is more like 6%-odd if you take inflation into account). I’m talking about the fact that there are barely enough transactions taking place for it even to be described as a genuine market.
The number of approvals for new home loans fell to just above 45,000 in April. That’s down 8% on the year. Far more importantly, it compares to a November 2006 peak of nearly 130,000. Make all the excuses you want about Easter falling late in April, or Pippa Middleton distracting the British population from obsessively house-hunting for five minutes – the fact is that compared to even the pre-boom days of the mid-1990s, the British housing market is critically ill. Indeed, it’s on life support. And it’s the Bank of England that’s keeping it there.
It’s hard to condemn the Bank. By holding the base rate at 0.5% it has staved off a wave of repossessions, and given the banks breathing space to bolster their balance sheets by refusing to lend to anyone else. That sounds like a result. But the trouble is, just as the European Union is trying to put off dealing with the Greek problem by pretending it’ll be able to repay its debts at some point in the future, so the Bank’s efforts may simply be delaying the pain.
For example, British banks are still being unrealistic about the potential problems they face. As Danny Gabay of Fathom Consulting noted in The Daily Telegraph, write-off rates on lending to UK households are no higher than in 2001. “Banks should be making much larger provisions because the current state is artificial,” he says. “We have lower foreclosure rates than during the boom. It’s just not plausible.” Meanwhile, Morgan Stanley expects house prices to fall by 10% by the end of 2012, assuming the Bank raises rates by a mere 150 basis points (1.5%).
What does all this mean? To us, it suggests the Bank will keep rates as low as possible for as long as possible, even in the face of persistent inflation. That means the main thing you should worry about as an investor right now is protecting your wealth from rising prices.
Our Roundtable experts have several tips for us this week, but the one that every one of you should heed is to take advantage of your National Savings & Investment certificate allowance, if you haven’t already. As for house prices, even if the Bank doesn’t hike rates, we’ll see them falling further. Recent data suggest the economy is weakening, largely because that same inflation is now sapping consumers’ spending power. ‘Extend and pretend’ all you want, these things have a habit of getting you in the end, one way or another.