Getting the jitters as interest rates go on an upward spiral
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. co.uk. Edmund Conway is Economics Editor of The Daily Telegraph.