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Will UK Interest Rate Rises Crash House Prices?

Housing-Market / UK Housing Aug 20, 2015 - 02:21 AM GMT

By: Nadeem_Walayat

Housing-Market

UK interest rates have flat lined at 0.5% for 78 straight months, that now post the general election has market attention turning towards the prospects for the first of a series of interest rates hikes as signaled by the Bank of England. Firstly, understand this fundamental fact that interest rates at 0.5% has been a PANIC measure. The Bank of England has been in a state of perpetual PANIC for over the past 6 years of which 0.5% interest rates was just the first step towards propping up Britain's bankrupt banking system, the second step was the £500 billion or so of Quantitative Easing or money printing that has been stuffed into every orifice of the bankrupt banks, and the list goes on with capital injections and the Funding for Lending Scheme which has succeeded in eroding the purchasing power of savings (stealth theft) since it was first implemented since Mid 2012, ALL to prop up the Bank of England's banking sector brethren.


However, recently the Bank of England has tentatively began to signal in its "forward guidance" that the markets should prepare for the first of a series of Interest rates rises.

UK Interest Rates Forecast

It appears that in judging when to raise interest rates the Bank of England is continuing to ignore inflation which during the 0.5% era had ranged to well over 5% without a flicker out of the Bank of England, but instead the central bank has been focused firmly on wage inflation that this year has finally ticked out of depression to currently stand at an annual rate of 1.9%. This comes after 5 long years of negative real wage growth (after inflation) which is one of the primary reasons why the Bank of England has not budged on interest rates to date.

The probable triggering level for the first rise in interest rates will be when wage inflation consistently sustains itself above 2% for several months, which would soon be followed by a series of rate rises to above 2%. Furthermore the interbank market suggests that the first rate rise is likely to occur in February 2016, which the wage inflation trigger may bring forward to the end of 2015.

The pre financial crisis normal saw interest rates range between 5% and 6%. Though this time around given the near death experience of the global financial system, the process for raising rates is likely to be slow and measured which therefore implies a more realistic target would be rates rising to between 2.5% and 3% by the end of 2017.

Additionally, the markets given "forward guidance" will start to DISCOUNT the future which means that the bond, loans and savings markets are likely to significantly react long before the first interest rate hike materialises. Which implies borrowers should lock in low rates now, whilst savers should not fix savings for more than a year as a current typical 2 year fix of 2%, will have increased to at least 3% by the end of 2017 and maybe range as high as 4% on the best paying bonds.

UK Interest Rates and House Prices

The consensus view in the mainstream press and blogosfear is that rising interest rates could burst the UK housing bubble, and even trigger a crash in UK house prices. However, as my series of UK housing market articles for the duration of the current UK housing bull market have illustrated that interest rates are just one driver for house prices, and that on there own are unlikely to end the UK house prices bull market as the following summary of key megatrend drivers illustrate:

  • Immigration - Continuing out of control immigration that results in net immigration of over 300,000 people per year, totaling over 4 million since the last Labour government opened the flood gates that is the fundamental cause of Britain's housing crisis and for which there is NO end in sight, that looks set to persist / worsen for another decade!
  • House Building - The UK consistently only builds about half the number of houses needed each year to meet existing demand, approx 140k against demand for 280k which results in a worsening housing crisis each year with demand far out pacing supply, so even those able to buy will find it difficult to find their dream home.
  • Flood of Foreign Money - Hundreds of billions of Chinese, Russian and Arab dollars are flooding into the UK each year so as to escape the potential for domestic government theft which in large part finds its way into London's property market that sends ripples of house price inflation out across the UK housing market. However most of these naive foreign investors are buying the worst type of properties to own - FLATS! Which means most will pay a price for their error in judgement.
  • Cash Buyers - Twenty years ago approx 20% of buyers were all cash buyers, today that number has doubled to 40% of all transactions. Furthermore approx 50% of home owners do not have a mortgage which reduces any market impact of interest rate hikes.
  • Perpetual Debt Bubble - The UK is a serial money printer that bends over backwards to support the UK housing market through a myriad of schemes such as the Help to Buy scheme, the reason for this is not really to help home buyers but to support the UK debt bubble, and the biggest debtors are the Government and the banks. Therefore new schemes and scams will be thought up to ensure that housing bubble continues to inflate so as to keep the system solvent as the debt is never meant to be repaid but rolled over in perpetuity whilst letting inflation do its job. And if that were not bad enough the world is awash with money printing central banks that tend to always press the PRINT button whenever faced with a crisis, and that the money printing tends to ripple out across the worlds asset markets including the UK property market. For instance the European Central Bank is currently printing Euro 60 billion a month, a significant portion of which is finding its ways into inflating the UK housing market.

Taking a look at what house prices have actually done during previous interest rate cutting and raising cycles reveals a pattern that is completely contrary to the consensus view that interest hikes will result in falling UK house prices as the historic facts imply the complete opposite!

For instance the great housing bull market of the noughties was during a RATE RISING CYCLE, whilst the crash in house prices was accompanied by deep cuts in UK interest rates. Therefore historically UK house prices usually tend to RISE when interest rates are Rising and FALL when interest rates are Falling. Which actually is a common sense market response for interest rates tend to be raised to cool and regulate an over heating booming economy. Whilst interest rate cuts tend to take place in support of a weakening economy that is fast heading towards recession or worse. Therefore interest rate hikes this time around will also be a GOOD indicator for future house price inflation which again is completely contrary to the academic noise that is liberally regurgitated by the pseudo economists (journalists) in the mainstream financial press that today in unison warn of the negative consequences of interest rate hikes on UK house prices as illustrated by the following recent headlines:

Interest rate rise by the Bank of England is the "greatest risk" to house prices - City AM

Homeowners 'must prepare now for an interest rate rise' - BBC

Housing market could face collapse if base rate rise hits buyer confidence - The Guardian

Housing Market in UK May Collapse if Buyer Confidence Hits Base Rate unlike the US - Reality Today

......

UK House Prices

The latest UK house prices seasonally adjusted data published by the Halifax registered a fall of 0.4% for July 2015 that followed a post election surge of 2.6% surge for June as George Osborne succeeded in his pre-election house prices boom timed to reach maximum intensity by election day. Following which house prices are starting to show signs of rolling over in the monthly data. Another point to make is that average UK house prices hit a new all time high for June data and remain 1% above the previous bull market peak, so much for the bubble bursting doom merchants of the past several years!

House Prices Momentum

The Non seasonally adjusted UK house prices momentum graph more clearly illustrates the point that the UK house prices boom was engineered to peak just prior to election day at +10.3%, that has now slid to +7%.

The decline in momentum remains in line with my long standing expectations for house prices momentum to fall in the months following the general election. However, don't take this post election slowdown as a harbinger of anything other than a mild correction as I expect the over-riding bull market trend to reassert as the earlier fundamental drivers illustrated the reasons why, and also that which the doom merchants cling to such as interest rate hikes and lack of affordability are red herrings.

The following graph further illustrates the effect of out of control immigration on UK house prices as the ratio between the accumulative change in population since 1970 against the accumulative number of new housing builds also since 1970 as an over crowding ratio that illustrates the worsening trend in the level of over crowding due to inability of new supply to meet new demand that just keeps accumulating each year which acts to propel house prices ever higher regardless of the stream of academic theories as to why house prices cannot rise because they have become increasingly un-affordable, far out pacing average wages.

UK House Prices 5 Year Forecast

It is now 19 months since excerpted analysis and the concluding 5 year trend forecast from the then forthcoming UK Housing Market ebook was published as excerpted below-

UK House Prices Forecast 2014 to 2018 - Conclusion

This forecast is based on the non seasonally adjusted Halifax House prices index that I have been tracking for over 25 years. The current house prices index for November 2013 is 174,671, with the starting point for the house prices forecast being my interim forecast as of July 2013 and its existing trend forecast into Mid 2014 of 187,000. Therefore this house prices forecast seeks to extend the existing forecast from Mid 2014 into the end of 2018 i.e. for 5 full years forward.

My concluding UK house prices forecast is for the Halifax NSA house prices index to target a trend to an average price of £270,600 by the end of 2018 which represents a 55% price rise on the most recent Halifax house prices data £174,671, that will make the the great bear market of 2008-2009 appear as a mere blip on the charts as the following forecast trend trajectory chart illustrates:

In terms of the current state of the UK housing bull market, the Halifax average house prices (NSA) data for July 2015 of £203,020 is currently showing a 2.8% deviation against the forecast trend trajectory, which if it continued to persist then in terms of the long-term trend forecast for a 55% rise in average UK house prices by the end of 2018 would translate into an 10% reduction in the forecast outcome to approx a 45% rise by the end of 2018.

Therefore the bottom line is that interest rate hikes are unlikely to have ANY impact on the over-riding bull market trend that I expect to continue to persist all the way into the end of 2018, and likely several years beyond. Furthermore I would like to reiterate that probability continues to strongly favour an outright Conservative election victory in 2020, as discussed here - 08 May 2015 - UK House Prices Correctly Forecast / Predicted Conservative Election Win 2015.

On a side note, recent press stories of net immigration to approach 1 million into Germany this year, about five times 2014 total, implies German cities are likely to be Europe's next next big property hotspots with German property prices on the verge of booming for many years to come.

U.S. House Prices

My long standing forecast for US house prices covering the period November 2012 to early 2016 is now entering its final phase as excerpted below:

12 Jan 2013 - U.S. Housing Real Estate Market House Prices Trend Forecast 2013 to 2016)

US House Prices Forecast 2013 to 2016

US House Prices Forecast Conclusion - As you read this, the embryonic nominal bull market of 2012 is morphing into a real terms bull market of 2013, with each subsequent year expected to result in an accelerating multi-year trend that will likely see average prices rise by over 30% by early 2016, which translates into a precise house prices forecast based on the most recent Case-Shiller House Price Index (CSXR) of 158.8 (Oct 2012 - released 26th Dec 2012) targeting a rise to 207 by early 2016 (+30.4%).

The latest U.S. house prices data released for May 2015 (194.00) shows that U.S. house prices continue to closely track my forecast trend trajectory.

Ensure you are subscribed to my always free newsletter for ongoing in-depth analysis and detailed trend forecasts that include the following planned newsletters -

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By Nadeem Walayat

http://www.marketoracle.co.uk

Copyright © 2005-2015 Marketoracle.co.uk (Market Oracle Ltd). All rights reserved.

Nadeem Walayat has over 25 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis focuses on UK inflation, economy, interest rates and housing market. He is the author of five ebook's in the The Inflation Mega-Trend and Stocks Stealth Bull Market series that can be downloaded for Free.

Housing Markets Forecast 2014-2018The Stocks Stealth Bull Market 2013 and Beyond EbookThe Stocks Stealth Bull Market Update 2011 EbookThe Interest Rate Mega-Trend EbookThe Inflation Mega-trend Ebook

Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication that presents in-depth analysis from over 1000 experienced analysts on a range of views of the probable direction of the financial markets, thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any trading losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors before engaging in any trading activities.

Nadeem Walayat Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Andy
20 Aug 15, 10:59
Govt starting to tinker

Great analysis as usual. The last budget announced the govt are starting to tinker at the margins of the property market, altering the tax regime for the BTL market, which I expect makes up a significant proportion of property purchases. I expect this will cause a softening in demand from landlords, chipping away at the margins of the housing market.

Residential property is increasingly subject to political risk, every year there's a larger proportion of voters locked out of the market increasingly disillusioned with how things aren't working for them. The popularity of Corbyn is a case in point which I expect is driven by many under 40s priced out of their own towns and cities. At some point, once the 'have nots' start to outweigh the 'haves' the govt will be forced into more housing market manipulation but this time down, not up. The electorate will vote for the party to give them what they want.

As you've stated on many occasions, the market is driven by sentiment and playing with the margins alters sentiment. Therefore do you think the govt starting to tinker at the margins of the property market is likely to slow the rate of growth?


Nadeem_Walayat
20 Aug 15, 20:11
UK housing bull market

Hi

I don't see any end on sight for the housing bull market. That could run for another decade.

Though as you illustrate it is very easy to find reasons why house prices should fall, but they just won't. Not until the fundemental drivers as stated in this article are neutralised.

Best

NW


radthelad
20 Aug 15, 20:54
Housing Bull Market?

Hi

Great analysis as Andy said

Well, with the FTSE entering 10% correction terriory, how do you see this impacting HPI.

What if we are entering, contary to earlier forecasts, a full blown bear market. Tha's when it will get really interesting. The speed of the fall in the Dow, FTSE and Dax makes me wonder if this is a real fly in the ointment - forget interest rates!

Your thoughts


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