The UK Housing MarketDid you notice that the Bank of England has raised interest rates twice in two months? Each by 0.25%. If I didn't know better, I'd swear we are starting to get towards the end of this enormous housing bubble. It is a situation which will cause worry for many. If the housing market stops it's never ending ascent it could hit the economy in a number of ways. The trouble is, how can you tell? Around two years ago, I sold my property in the UK. At the time, the UK housing market was what the experts call 'frothy' or 'fast moving'. In laymans terms, that means they had no idea what any property was worth because you could ask almost any price within reason and someone will pay it. Guess what I did? Yes! I asked a ludicrous price for my one bed flat and the first viewer paid in full. When I say ludicrous, my estate agent thought it was worth £60,500, I thought it was worth £61,000. So I put it on the market for £69,500. I just made the number up! In other words, I added more than 10% to the price just to see if I could. And, I could. That, is frothy. At the time, I could not believe the market was moving so fast. Every time I wrote a mortgage, the property would be up about 10% between application for the loan and completion (when the property actually changed hands). Anyone who didn't buy immediately in a chain was priced out of the market within just six weeks. In truth, it was both scary and funny with a kind of disbelief at the same time. At the time, I thought the market was too high, but look how it has increased since then! In 2003, the UK housing market settled down. It rose by a far lower annual percentage (it differs from region to region but was around 15% on average) whilst much of London actually fell slightly in value. First time buyers seemed to have vanished, but up prices went. The major lenders spoke of a 'soft landing', whatever that may mean. Here we are in 2004 and the market is 'flying' again. Figures released for April show prices nationally are up by 4.5%. It used to be that property prices moved largely in line with inflation. Figures I have seen for America show this to be the case from the 1950's to around 1995. I would guess that in general terms, the UK isn't much different. So how does a market that is already valued very highly increase by 4.5% in just ONE MONTH? With interest rates having been at historical lows, supply and demand issues and easing lending criteria, it is easy to see how prices can have risen. Yet now, as rates rise, this must surely signal the end of the party. The Bank of England must want it all to stop. Consider that if you arranged a mortgage at four percent, by the time it moves to five percent, your interest costs will be up around 25%. For those of you that can remember paying at 15% and more, this must sound like a real wheeze. But, rising mortgage costs (all the other loan and credit card costs will rise too), exorbitant petrol prices, an increasing tax burden and wages not keeping pace will squeeze the average budget very hard. This could cause: Increasing rates of repossessions and bankruptcy House prices to fall Lenders to have bad debts on their books Consumer spending to slow - or to stop Minimal stock market growth - or falling markets These things of course aren't all bad. (Ok they are bad!) But the easiest way of making money in investment is to buy low and sell high. If you are saving for the long term, retirement for example, then regular investment in down markets will probably prove to be very profitable in years to come. If you look at other housing markets, it is difficult not to see similar problems lurking. In America, for example, Alan Greenspan has recently spoken about the need to raise interest rates and followed this up with a 0.25% increase. Personally, I must assume that this being an election year, he has been under threat of 'interrogation' in Guantanamo Bay should he do anything drastic to their 46 year low rates. Well, before the election at least... All the figures I have seen seem to suggest that the US property market is far more highly valued than the UK. Possibly only in Australia has it risen faster. Ok, so I am being Mr Doom-and-Gloom. But, all of this starts with a rise in the cost of borrowing. Of course, each market is different. Here in Brussels, it is hard to imagine the good areas not increasing in price this year. Already (as I can tell) prices are rising strongly and are anticipated to put in an 8% return for 2004. But the Belgian market is very different to the UK. Very different. The tax burden (at purchase) is very high, so people just don't speculate. They all buy for the long term and the market is, therefore, rather illiquid. Until you sell, you can never really know what your property is actually worth. (Often, people are still unsure then!) * This article was published in July 2004 * An addendum to this article can be read here:
|