Best of the Week
Most Popular
1. Five Charts That Show We Are on the Brink of an Unthinkable Financial Crisis- John_Mauldin
2.Bitcoin Parabolic Mania - Zeal_LLC
3.Bitcoin Doesn’t Exist – 2 - Raul_I_Meijer
4.Best Time / Month of Year to BUY a USED Car is DECEMBER, UK Analysis - Nadeem_Walayat
5.Labour Sheffield City Council Election Panic Could Prompt Suspension of Tree Felling's Private Security - N_Walayat
6.War on Gold Intensifies: It Betrays the Elitists’ Panic and Augurs Their Coming Defeat Part2 - Stewart_Dougherty
7.How High Will Gold Go? - Harry_Dent
8.Bitcoin Doesn’t Exist – Forks and Mad Max - Raul_I_Meijer
9.UK Stagflation Risk As Inflation Hits 3.1% and House Prices Fall - GoldCore
10.New EU Rules For Cross-Border Cash, Gold Bullion Movements - GoldCore
Last 7 days
Jim Rickards: Next Financial Panic Will Be the Biggest of All, with Only One Place to Turn… - 20th Jan 18
Macro Trend Changes for Gold in 2018 and Beyond - Empire Club of Canada - 20th Jan 18
Top 5 Trader Information Sources for Timely, Successful Investing - 20th Jan 18
Bond Market Bear Creating Gold Bull Market - 19th Jan 18
Gold Stocks GDX $25 Breakout on Earnings - 19th Jan 18
SPX is Higher But No Breakout - 19th Jan 18
Game Changer for Bitcoin - 19th Jan 18
Upside Risk for Gold in 2018 - 19th Jan 18
Money Minute - A 60-second snapshot of the UK Economy - 19th Jan 18
Discovery Sport Real MPG Fuel Economy Vs Land Rover 53.3 MPG Sales Pitch - 19th Jan 18
For Americans Buying Gold and Silver: Still a Big U.S. Pricing Advantage - 19th Jan 18
5 Maps And Charts That Predict Geopolitical Trends In 2018 - 19th Jan 18
North Korean Quagmire: Part 2. Bombing, Nuclear Threats, and Resolution - 19th Jan 18
Complete Guide On Forex Trading Market - 19th Jan 18
Bitcoin Crash Sees Flight To Physical Gold Coins and Bars - 18th Jan 18
The Interest Rates Are What Matter In This Market - 18th Jan 18
Crude Oil Sweat, Blood and Tears - 18th Jan 18
Land Rover Discovery Sport - Week 3 HSE Black Test Review - 18th Jan 18
The North Korea Quagmire: Part 1, A Contest of Colonialism and Communism - 18th Jan 18
Understand Currency Trade and Make Plenty of Money - 18th Jan 18
Bitcoin Price Crash Below $10,000. What's Next? We have answers… - 18th Jan 18
How to Trade Gold During Second Half of January, Daily Cycle Prediction - 18th Jan 18
More U.S. States Are Knocking Down Gold & Silver Barriers - 18th Jan 18
5 Economic Predictions for 2018 - 18th Jan 18
Land Rover Discovery Sport - What You Need to Know Before Buying - Owning Week 2 - 17th Jan 18
Bitcoin and Stock Prices, Both Symptoms of Speculative Extremes! - 17th Jan 18
So That’s What Stock Market Volatility Looks Like - 17th Jan 18
Tips On Choosing the Right Forex Dealer - 17th Jan 18
Crude Oil is Starting 2018 Strong but there's Undeniable Risk to the Downside - 16th Jan 18
SPX, NDX, INDU and RUT Stock Indices all at Resistance Levels - 16th Jan 18
Silver Prices To Surge – JP Morgan Has Acquired A “Massive Quantity of Physical Silver” - 16th Jan 18
Carillion Bankruptcy and the PFI Sector Spiraling Costs Crisis, Amey, G4S, Balfour Beatty, Serco.... - 16th Jan 18
Artificial Intelligence - Extermination of Humanity - 16th Jan 18
Carillion Goes Bust, as Government Refuses to Bailout PFI Contractors Debt and Pensions Liabilities - 15th Jan 18
What Really Happens in Iran?  - 15th Jan 18
Stock Market Near an Intermediate Top? - 15th Jan 18
The Key Economic Indicator You Should Watch in 2018 - 15th Jan 18
London Property Market Crash Looms As Prices Drop To 2 1/2 Year Low - 15th Jan 18
Some Fascinating Stock Market Fibonacci Relationships... - 15th Jan 18
How to Know If This Stock Market Rally Will Continue for Two More Months? - 14th Jan 18
Everything SMIGGLE from Pencil Cases to Water Bottles, Pens and Springs! - 14th Jan 18
Land Rover Discovery Sport Very Bad MPG Fuel Economy! Real Owner's Review - 14th Jan 18
Gold Miners’ Status Updated - 13th Jan 18
Gold And Silver – Review of Annual, Qrtly, Monthly, Weekly Charts. Reality v Sentiment - 13th Jan 18
Gold GLD ETF Update.. Bear Market Reversal Watch - 13th Jan 18
Stock Market Leadership In 2018 To Come From Oil & Gas - 13th Jan 18
Stock Market Primed for a Reversal - 13th Jan 18
Live Trading Webinar: Discover 3 High-Confidence Trade Set-Ups - 13th Jan 18
Optimum Entry Point for Gold and Silver Stocks - 12th Jan 18
Stock Selloffs Great for Gold - 12th Jan 18
These 3 Facts Show Gold Is Set to Surge in 2018 - 12th Jan 18
How China is Locking Up Critical Resources in the US’s Own Backyard - 12th Jan 18
Stock futures are struggling. May reverse Today - 12th Jan 18
Three Surprising Places You See Cryptocurrency - 12th Jan 18
Semi Seconductor Stocks Canary Still Chirping, But He’s Gonna Croak in 2018 - 12th Jan 18
Land Rover Discovery Sport Panoramic Sunroof Questions Answered - 12th Jan 18
Information About Trading With Alpari And Its Advantages - 12th Jan 18

Market Oracle FREE Newsletter

6 Critical Money Making Rules

Pick up in UK house price growth seals a May interest rate rise

Housing-Market / UK Housing Apr 26, 2007 - 11:49 PM GMT

By: Nationwide

Housing-Market Pick up in house price growth seals a May interest rate rise
• Pace of house price growth picks up in April, but trend still shows a gradual cooling
• Market demand has been supported by movers, but this too is beginning to wane
• Too rapid an increase in rates could destabilise the market
• Current economic conditions suggest that a house price crash is unlikely


Commenting on the figures Fionnuala Earley, Nationwide's Chief Economist, said: “The Bank of England held off raising rates at the beginning of April, but the acceleration in house prices during the month makes a rate rise on the MPC’s 10th anniversary look like a certainty. The pace of house price growth almost doubled during April to 0.9%, up from 0.5% in March. This brings the annual rate of
inflation back into double digits at 10.2% and the price of a typical house up to £180,314, which is £16,741 higher than at this time last year.

“However, while the monthly rise in prices is stronger than the MPC would have liked to see, it can take some comfort from the fact that the underlying trend is softening and the return to double-digit annual growth largely reflects a weak period this time last year. The three-monthly growth rate, which smoothes the volatility of the monthly series, is still cooling in response to the earlier rises in interest rates. The latest figures show prices increased by 2% between February and April, the lowest three-monthly growth rate since last August.

Caution against sharp rate rises which could destabilise the market

“While a stable economic environment with contained inflation is essential for a well behaved housing market, we would caution against too sharp an interest rate response to current economic data. In our view, the talk of rates climbing to 6% and beyond are overblown and if implemented in the current climate could be damaging to housing market stability. With the market already showing signs of cooling, too sharp a rate hike could undermine market confidence and dry demand up swiftly. But on top of this, the could also lead to
widespread payment difficulties which, in an illiquid market, could precipitate price falls.

Movers have supported market demand…

“Housing demand has been resilient, but there are signs that this is beginning to wane across the board. During 2006 there were 43,000 more first-time buyers than in the previous year and 56,000 more buy-to-let purchasers. But existing homeowners trading mongst themselves were even more active with an increase of more than 84,000 purchases. However, affordability for those entering the market has deteriorated and led to a fall in the numbers jumping onto the housing ladder more recently. Between December 2006 and February2007, 3,200 fewer first-time buyers managed to get onto the ladder compared with the same period a year earlier. Even demand from movers may now be beginning to moderate with 2,500 fewer movers in February compared with the previous month.

…but are not immune to interest rate rises

“These existing homeowners, many with large amounts of equity as they purchased their property prior to the recent house price rises, have been able to continue to trade for longer as they could absorb some of the transactions costs such as stamp duty, deposits and fees in new mortgage borrowing. But they are not immune to further interest rate rises. As the amount borrowed has increased, so will the impact of rises in interest rates on their mortgage payments. Levels of mortgage equity withdrawal have also been increasing
adding to overall debt levels and ratcheting up the impact of further rate rises.

“57% of the total number of people with a mortgage have a variable rate mortgage. Since July, the average rate payable has increased by 0.65% (less than the 0.75% increase in the base rate) from 5.46% to 6.11%. The average amount outstanding on a mortgage at the end of 2006 was £85,500 which means that the combined increases in mortgage rates have added only about £30 per month to the monthly payment. However, the average includes some very old loans and low value loans. More recent borrowers will have faced a much larger increase in monthly payments. A variable rate loan of £150,000 for example would already have seen an increase of around £60 and one of £200,000, £80 per month.

“At this level, the past increases are not insignificant, but should be manageable, especially as larger borrowers tend to take out fixed rate loans. Indeed, 76% of all house purchase and remortgage loans were taken out on a fixed rate in February. However if the MPC was to hike rates sharply there is a risk that many borrowers on popular tracker rate products could find themselves with payment difficulties. A further 1% increase in rates would mean an extra monthly payment of £153, compared with pre-rate rise payments on a
£150,000 loan – an increase of 16.7%. This could clearly be quite uncomfortable for some, and those coming off fixed rate loans priced at around 4.99% two years ago would face an even greater payment hike of around£200 per month.

House price crash predictions are premature

“Some commentators are already suggesting that the market is poised for a fall with affordability so stretched, especially for first-time buyers. At a simplistic level, a move in the house price to earnings ratio back to its long term average would imply a fall in house prices of nearly 40%. However, the long term average house price to earnings ratio is not a good benchmark given that we would expect this ratio to trend upwards over time. Reasons for this include the decline in real and nominal interest rates since the 1980s and a change in people’s preferences towards housing as an investment, as a supplement or alternative to equity based pensions. In addition, as we have mentioned several times, the UK suffers from a slow response of housing supply to changes in demand, which supports house prices. Looking at mortgage payments as a proportion of take home pay, which takes lower interest rates into account, suggests that rates could increase by more than 2% before affordability (on this measure) became as stretched as in the late 1980s.

“A more important factor which would suggest that large price falls are unlikely in the current economic climate is the state of the general economy. Clearly there are risks to interest rates, but in the current circumstances it is not clear how big these are. Even the tone of Mervyn King’s letter to the Chancellor and his testimony to parliament seemed fairly sanguine. In both cases the Governor expressed the view that CPI inflation could fall back sharply over the next four to six months, which would suggest severe rate hikes are
unlikely. Back in the 1980s the collapse in prices came about following a sharp rise in interest rates (from 7.4% in mid 1988 to around 15% two years later) and a 1.4m increase in unemployment at a time when the economy was slowing. Today the economy is continuing to grow; the labour market has been remarkably strong and interest rates have increased by only 0.75% in the last two years.”

By Fionnuala Earley
Chief Economist
Tel: 01793 656370
fionnuala.earley@nationwide.co.uk

Katie Harper
Press Officer
Tel: 01793 656215
katie.harper@nationwide.co.uk


© 2005-2018 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules