Get­ting the jit­ters as in­ter­est rates go on an up­ward spi­ral

The Daily Telegraph - Property - - Marketplac­e - Ed­mund Con­way

I’m start­ing to get a lit­tle wor­ried about house prices. It’s not pleas­ant to con­tem­plate the po­ten­tial doom of the hous­ing mar­ket – par­tic­u­larly if you’re a first­time buyer who’s barely got his fin­ger­nails on the first rung of the lad­der. But in my view things are look­ing a lot hairier than for some time.

I still don’t think prices will crash, but there’s some­thing in the air that makes me ner­vous. It wasn’t the hike in in­ter­est rates that got me fret­ting, al­though it was ob­vi­ous ear­lier this month when the Mone­tary Pol­icy Com­mit­tee raised bor­row­ing costs for the first time in two years that it would only ac­cel­er­ate the cur­rent rate of re­pos­ses­sions and bank­rupt­cies.

Nor was it the fact that Mervyn King hinted that an­other in­crease in rates would be nec­es­sary in the com­ing months. No, what’s even more wor­ry­ing is the fact that it’s al­most im­pos­si­ble to find any econ­o­mist out there who is pre­dict­ing prices will crash. In most cir­cum­stances, this would be a good thing, but the old adage about how a bub­ble only bursts af­ter the last bear be­comes a bull is an­noy­ingly ac­cu­rate.

Even Roger Boo­tle, the founder of Cap­i­tal Eco­nomics who fa­mously pre­dicted a 20 per cent fall in house prices a few years ago, has mod­er­ated his views on the mar­ket. One of his em­ploy­ees told me the other day that, even if rates con­tinue to rise, a full-scale crash seems very un­likely.

But does it re­ally? I have men­tioned the fact that one of the fac­tors sus­tain­ing the top end of the mar­ket was the chunky rise in bonuses for bankers and hedge-fund man­agers. But the more I hear about this part of the mar­ket, the more wor­ried I get.

Let’s take the ex­am­ple of a 27-year-old hedge-fund man­ager, Mr X. Over the past few years, he has saved £200,000 for a de­posit. He is tak­ing out a £700,000 mort­gage on a big Lon­don flat, and so big is the mort­gage that the monthly pay­ments are big­ger than his take-home monthly salary. In other words, he is bar­gain­ing that the bonus he re­ceives this Christ­mas is enough both to pay off a sig­nif­i­cant chunk of his mort­gage and to pro­vide his liv­ing costs.

If rates rise too high, or if bonuses dis­ap­point, peo­ple in sim­i­lar straits might be forced into a panic sale of their home.

Then there’s the le­gion of home­own­ers with one or two buy-to-let prop­er­ties, many of whom will now be re­al­is­ing that rents are sim­ply not mov­ing, and that it’s of­ten dif­fi­cult to fill their flats. If th­ese peo­ple de­cide that their sec­ond homes aren’t the in­vest­ment they hoped for and sell up, we might re­ally be in trou­ble.

Both of th­ese are gloomy sce­nar­ios, and nei­ther seem par­tic­u­larly likely. But there’s no avoid­ing the fact that higher in­ter­est rates have in­creased their prob­a­bil­ity. And record gas and elec­tric­ity bills, not to men­tion higher taxes, are not help­ing. Þed­mund. con­[email protected]­graph. Ed­mund Con­way is Eco­nomics Ed­i­tor of The Daily Tele­graph.

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