Undertsanding stress tests on mortgage rates

AS a top up to last week’s column on what drives housing markets here are some further thoughts. I don’t engage in what the market did in 1894, 1945, or all those historic analyses.

I saw a rerun-on Bullseye, the darts programme when I was in a hotel room and Bully’s special prize was an electric typewriter. The chap who won it was over the moon. Things have moved on.

The modern-day economy has little in connection with anything really unless its post the surge of home ownership in the 1980s. The spikes in the market are pretty marked after that point and relate more to how we currently think about property and have access to it.

While it’s more evident on a graph, the surge and euphoria of an unsophisticated market in 1982 to 1989 created a growth of 79% over seven years. That dealt a fall of 37% in the next six and a half years with interest rates over 15%, only to be followed by greater access to capital and borrowing in 1995, driving growth by over 173% in nearly 12 years.

There are points during these periods where it is obvious that prices are heated, but, as I said last year, even though they are...‘they don’t need to pop. They can whimper a little and allow wages to catch up.’

Peter McGahan

That’s what we have seen. The skill is always in taking the emotion out of the perceived peak or trough and the way to do that is not to think of it as good or bad. Rather, it’s just information. When it’s soaring, thinking it’s good won’t help you make good decisions. When it’s at rock bottom, the same applies.

Just like stock markets, there is no bell rung at the top or the bottom. In Q3 of 2007, people were euphoric about prices. By Q1 of 2009 prices had plummeted 18.7%.

On a graph, that period looks horrendous, where the initial spike at the end of 2005 to 2007 was obscene and is very visible. If you zoom out and draw a line through it, the curve from 2004 to 2014 is all in the same trajectory.

The skill, it would seem, is just about not buying in Euphoria. Try telling that to most people. It is however, at times like those, that banks are much looser with their monetary lending, so it’s no surprise that with access to borrowing not as readily available up to this point that many dive onto a potential runaway train.

My late dad always told me he liked to walk when people where running. If you want to excel at that, read Fred Harrison’s ‘Power in the Land.’

From that peak in 2007 (pre the immediate fall), the housing market has still risen over 41%, even with the most recent calming.

Let’s remember that a property is a good asset to hold if there is inflation. It’s a sort of hedge. There are only so many of them and while they can build more, there is an economic point at which they are worthwhile to do so, which either increases house prices, or alternatively they are not built because there is no money to be made.

To know the market involves an economics mindset alongside a solid psychology mindset, and being inside the mind of the Bank of England. A well-researched estate agent alongside a good investment research team is a great plan, but not common.

From here, much depends on where interest rates go (opening borrowing capacity and then confidence). Twenty months ago, we said they would rise but come back down again with inflation.

That has happened and is happening. As inflation comes further under control, rates will ease further, but this is well documented in this column by showing what the price of money is today for money you want to borrow in future years.

That’s readily available to the keen eye and all the numbers are downwards.

However, for most of us, let’s remember, our home is our home, and all we need to do is focus on whether we can afford it and can continue to do so, with stress tests on future mortgage rates.

» For a complimentary mortgage review please email my mortgage director Pat Greene on pgreene@wwfp.net or call 01872 222422. Also ask Pat for the latest copy of our Mortgage Interest Rate Guidance Report.

» Peter McGahan is the chief executive officer of independent financial advisers Worldwide Financial Planning. Worldwide Financial Planning is authorised and regulated by the Financial Conduct Authority.

6The housing market has gone through a series of peaks and troughs and will continue to do so