Now we’re listening
If you're wondering whether now is a good time to buy a property in Britain, just ask yourself where you think interest rates will go, says Merryn Somerset Webb.
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
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
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.
Sign up to Money Morning
Our team, led by award winning editors, is dedicated to delivering you the top news, analysis, and guides to help you manage your money, grow your investments and build wealth.
Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).
After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times
Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast - but still writes for Moneyweek monthly.
Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.
-
UK GDP: Economy returns to growth in August
The economy grew by 0.2% in August, according to the latest UK GDP figures. Will it influence the Bank of England’s next interest rate decision?
By Katie Williams Published
-
Tipping culture: when to tip and how much is too much?
Travel Tipping culture in one country can be very different from another. If you want to know when to tip, when to skip, and how much to give – we’ve got you covered
By Oojal Dhanjal Published