The rate of interest is up. Not the level set by the central bank, that is still stuck where it’s been for some time, but the rate set by markets which in turn determines the interest typically paid by mortgage holders. All the hysteria of recent weeks, all the talk that inflation is on its way back and that global rates are set to rise, has led to fears that sooner or later the Bank of England too will up the cost of borrowing. This has immediately led to an increase in wholesale money market levels. As the Nationwide said yesterday: “Since April, the change in rates corresponds to the impact of an actual 25 point rate hike in the base rate. Tracker mortgage rates tied to the base rate, by definition, remain unchanged, but additional talk of rate hikes is still likely to affect borrower sentiment, particularly when there are increasing reports of job losses and consumer confidence is fairly subdued.”
The key question though is this: how will house prices be affected? Markets have tumbled, and commodities are down. The FTSE 100 has seen a reversal of all the good work seen in the first four months of this year, and by the end of May was languishing at the same level it was in December last year. Some say realism has hit markets, that bubbles always burst. But does the same argument apply to house prices?
History tells us that sometimes house prices and equities move in opposite directions. It’s as if there’s only so much money ’slushing’ around the economy, and if it goes into property, then there is less left over for shares. That could partially explain why house prices were going up during the first few years of this decade, while shares experienced a torrid time. So just because prices have been falling on the markets, it does not mean property values will fall too.
But then again, maybe there’s another lesson to be learnt. Human nature, it appears, tends to look at recent trends when making predictions about the future and ignores the lessons of history. If shares went up last week, and for a few weeks in a row, then we tend to assume they will go up next week too. If house prices have been going up, then we implicitly assume this trend will continue. Common sense tells us that if markets are out of kilter with long run averages then sooner or later there will be an adjustment. Human nature often makes us blind to this common sense view.
Then, every now and again there’s an adjustment, and the wise after the event experts, say “told you so,” even though very few of us can remember them saying any such thing.
The US balance of payments deficit is a good example. For years some have been arguing the US is spending too much abroad; it will end in tears. Others say, “yeah, yeah, it’s the same old warning, but then it never happens.” And yet right now, it’s growing fears over the US trade deficit and that at last the US consumer has finally run out of puff, that is partially behind the recent turmoil, and is behind fears that the bear market is set to continue. It’s as if the years of dis-equilibrium between the US and the rest of the world, is un-ravelling; gravity, is finally working.
It was a similar story at the end of the last decade, when share prices rose above historical average. The optimists said it’s different now, there’s a new paradigm. But when markets finally collapsed, the view was that in time normality always returns.
Market crashes always seem to be preceded by a silly season. Just before the 1987 crash, Saatchi and Saatchi tried to buy the Midland Bank. When markets crashed in 1929, the man on the street was a veritable share expert, and just before the dot com crash, it felt as if everyone who was anyone just had to have shares in an internet company.
But this time around it’s harder to find the silly stories; the media excess. The most popular TV program of the year on business was based on the premise of firing people. While if there was a lesson to be learnt from that other big TV hit on business, “the Dragon’s Den”, it’s how hard it is to raise money.
Still with the media. A few years ago, programs on the UK house market were all the rage. You know the sort of thing: “Can you turn £100,000 into £1mn, just by moving five times, and ignoring stamp duty, and estate agents fees, and the money you spend doing up each home.” At the time, it was felt that the plethora of programs was further evidence of a market overheating.
Today, the media seem more interested in buying homes abroad.
But if there is one saying that history tells us to beware of it’s this. When experts say: “Don’t worry if prices are above trend it’s a new paradigm now”, then that’s the time to take cover
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