Back in July last year, a home owner with a £150,000 mortgage would have faced mortgage payments of £918, or so says the Nationwide in its latest housing report. Today the payments would be £977, but if rates go up again next month (which just about everyone, including the Nationwide expects) monthly payments would jump to £1,000.
But if rates were increased by one percent by the end of 2007. as some predict, the monthly costs would soar to £1,071. Last week we told how some leading economists said rates should hit 7.5 percent, that’s 2.25 per cent up on the present level. The Nationwide has calculated that the monthly payments, on a 25 year mortgage, if rates were two per cent higher than present would be £1,169.
What does all that mean in terms of the property market? Nationwide says this: “With the market already showing signs of cooling, too sharp a rate hike could undermine market confidence and dry demand up swiftly. But on top of this, they could also lead to widespread payment difficulties which, in an illiquid market, could precipitate price falls.”
Ummm. So does that mean it’s time to take the hemlock? Relax, says Nationwide, in a calming tone when it said “In our view, the talk of rates climbing to 6 per cent and beyond are overblown.”
So what of the here and now? House prices jumped again in April, says the building society. “The pace of house price growth almost doubled during April to 0.9 per cent, up from 0.5 per cent in March. This brings the annual rate of inflation back into double digits at 10.2 percent and the price of a typical house up to £180,314, which is £16,741 higher than at this time last year,” said Fionnuala Earley, Nationwide’s chief economist.
She added, however: “While the monthly rise in prices is stronger than the MPC would have liked to see, it can take some comfort from the fact that the underlying trend is softening and the return to double-digit annual growth largely reflects a weak period this time last year. The three-monthly growth rate, which smoothes the volatility of the monthly series, is still cooling in response to the earlier rises in interest rates. The latest figures show prices increased by 2 per cent between February and April, the lowest three-monthly growth rate since last August.”
What about the poor, beleaguered first time buyer? Ms Earley said: “Affordability for those entering the market has deteriorated and led to a fall in the numbers jumping onto the housing ladder more recently. Between December 2006 and February 2007, 3,200 fewer first-time buyers managed to get onto the ladder compared with the same period a year earlier. Even demand from movers may now be beginning to moderate with 2,500 fewer movers in February compared with the previous month.”
We still remain sceptical about the so-called strength in house prices. If history has taught us anything, it is this: when prices rise above historical averages, they always come down - eventually. This argument that the measure which really counts is affordability, rather than price of property to income, is a false argument. For one thing, low inflation means that the true value of a mortgage is not eroded by rising wages as it used to be. For another thing, changes always happen. For as long as total price to income is so high, house prices will be vulnerable to a change in economic fundamentals. Who can say what next year, or 2009, will really bring?
One thing is for sure. The 15 years of uninterrupted economic growth may well continue for a few more years, but the run will end eventually. What then for house prices?
And don’t forget comments relating to the level of debt in the UK, made by the Item Club last week: “We are all skating - if not wobbling - on thin ice,” it said.
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