Now we’re listening

The best time to listen to what anyone in a top job says is when he is on the verge of leaving that job. So it is with Mervyn King, the governor of the Bank of England. Earlier this week, he noted that one of the main reasons why he had been so loath to see interest rates rise (and why his successor, Mark Carney, is likely to do whatever it takes to keep them down) is "because so many households have such a high level of household debt".

He went on to point out how foolish those with large mortgages have been not to pay down debt or downsize in the breathing space offered by the lowest interest rates in 300 years, and to make a suggestion as to what might happen next. If long-term interest rates were to rise to, say, 3%-4%, "some of those households will have levels of debt that won't look so attractive given the new lower level of house prices".

The key bit here is "new lower level of house prices". We have been pointing out for years that house prices are a function of the price of credit and nothing else. The shortage of supply and "pent-up demand" that mainstream analysts constantly go on about mean nothing in the absence of the cheap credit people need to pay for overpriced property. Instead, as King has now clearly spelt out, prices are all (and only) about rates.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

So if you are wondering whether now might be a good time to invest in property, there is no need to bother reading up on various buy-to-let strategies or regional variations in prices. All you need to do is to ask yourself where you think rates might go from here. The answer might be down Carney clearly has some major monetary plans but look a few years out, and there isn't really any answer but up and then up again.

Now look to the US where the most important number in the world has been on the move: the yield on ten-year Treasuries has gone from 1.7% to 2.6% in not much more than a month. This has had ripple effects throughout the world (most markets rise with quantitative easing (QE), so most markets tend to fall on the idea that QE might be removed).

That might reverse in the short term as it becomes clear that the US recovery isn't yet self-sustaining. But if it doesn't, we already have a small clue as to what rising rates could do to housing markets: US mortgage applications just came in at a 19-month low.

Back to British housing. We've recently seen much comment on how fast rents are rising. But assuming data from the Office for National Statistics are accurate, this is wrong. In the 12 months to May 2013 they rose 1.3% in England, 1% in Scotland and 1.5% in Wales. Translate that into real terms with inflation at (at least) 2.7%, and you'll see that on average rents are not rising but falling.