Falling mortgage rates won't stop the housing bust

Why now's the time to be hoarding cash

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House prices are falling more quickly than ever, according to the latest property survey.

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Prices fell by 1.2% in July, says Hometrack, picking up speed from June's 1% fall, and a 0.5% slide in May. Meanwhile, Bank of England data out tomorrow is likely to show that the number of new home loans approved hit a record low in June.

But could we be on the verge of a turnaround? The weekend press was full of the news that some mortgage lenders are actually starting to trim rates. A few commentators even suggested that it was nearly time to go bargain hunting.

It'd be nice if it was true, and that this was the quickest ever property bust in history. Sadly, it's just wishful thinking here's why

Mortgage rates are falling - so is it time to go bargain hunting?

Property prices in Britain are collapsing. But the news that some lenders are starting to trim rates again has the optimists out in full flood.

Swap rates (the interest rates banks have to pay to borrow money, basically) have fallen back below 6% in recent weeks. This has allowed a number of lenders, including Nationwide, Halifax and Abbey, to start trimming their mortgage rates.

The average two-year fixed rate being offered by the five biggest lenders has fallen from 7.01% at the start of this month, to 6.78% now, says Moneyfacts.

A number of pieces in the weekend money pages tentatively started to suggest that this might be the time for bargain hunting. The basic point is sure, lots of people still won't be able to afford to buy, but for those who can, it might be time to do so.

One writer suggested that "there is still huge pent-up demand for buying property. First-time buyers, bargain hunters, and professional investors are all eagerly waiting in the wings for a sniff of recovery."

The suggestion is that if these new buyers start to "make their move" as mortgages become more affordable, then the trickle of interest "could soon gather momentum as those who have been holding our act fast to avoid missing out on a bargain."

This idea of mortgage demand being like a vast reservoir only being held back by the dam of the credit crunch is quite appealing. But it makes no sense.

"Pent-up demand" is a nonsense concept, economically speaking. Almost anyone will buy almost anything at the right price. You could say there's a lot of pent-up demand for a Ferrari that costs less than £10,000. You could say there's a lot of pent-up demand for free pizza.

What the writer really means is that people haven't yet reached the "revulsion" stage of the bust. That is, the point at which they have had their fingers burned so badly by property that they would rather throw their telly out of the window than watch another episode of "Location, Location, Location" ever again.

Certainly, attitudes are changing. You don't hear the old "renting is dead money" clich half as much these days. But there probably are plenty of would-be bargain hunters still trawling around in buy-to-let land, hoping to "buy on the dips", as stock market traders would say.

Banks are now much choosier about who they lend money to

The problem is that most of these 'bargain' hunters still won't get a look in. Sure, loans might be getting a tiny bit cheaper. But will you be allowed to take one out? The big lenders are still asking for deposits of 10% or as much as 25% to get good rates. Buy-to-let loans are even stricter.

This is the point that MoneyWeek regular James Ferguson often makes about the property market in his Model Investor email (Find out more on Model Investor here) Lenders have more than one way to cut lending. They can make loans more expensive, which is easy for us to measure, simply by looking at the interest rates and arrangement fees.

However, they can also make loans harder to come by, which is not so easy for us to measure. You used to be able to get these two-year fixes simply by walking in off the street and smiling nicely at the mortgage salesperson. Now banks and building societies are only looking for the best, most credit-worthy business and they don't have limitless funds to lend either. That means they can afford to be much choosier about who they lend money to. If you're self-employed or have a less-than-perfect credit history, you can forget about the lower rates.

So the reality is that the only people who'll be able to even think about buying now, are the same ones who could have bought last month when rates were higher. That is, people who already have the cash to splash out, and who don't have to offload their own property before they buy another one.

And even they, as Edmund Conway in The Telegraph points out, still have to "contend with the threat of redundancy, continued high inflation, and the biggest squeeze on their disposable incomes since the 1970s."

Why now's the time to be hoarding cash

More to the point, it goes without saying that these cash-rich, high-net worth bargain-hunting types are probably smart enough to realise that as things get worse, their opportunities will only get better. The number of forced sellers in the market will only increase from here, meaning some genuinely decent property, rather than shoddy new-build buy-to-let fodder, will soon be going cheap.

The next few years are going to be tough. Now's not the time to be staking your future on a buy-to-let 'bargain'. Instead you should be hoarding cash for emergencies, and hopefully you won't have to use it and you'll have a nice pile still waiting to be invested when the storms have cleared a little.

Turning to the wider markets

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UK shares eased marginally on Friday as the FTSE 100 index lost 10 points, or 0.2%, to 5,353, having recovered from a 70 point drop earlier in the day on the back of Wall Street strength. Insurers suffered after the German giant Munich Re warned of substantial write-downs, with Standard Life slipping 3%, Aviva and Prudential dropping 4% and Legal & General sliding 7%. But HBOS added 3% on continued break-up rumours, while Barclays rose 2.4% to a one-month high, apparently on tracker fund buying. Rentokil Initial plunged 30% on yet another profit warning.

In Europe, the German Xetra Dax shed 0.1% to 6,437 although the French CAC 40 advanced 0.7% to 4,377.

US stocks picked up slightly on better-than-expected durable goods orders, with the Dow Jones Industrial Average adding 21 points, or 0.2%, to 11,371, while the wider S&P 500 gained 0.4% to 1,258 and the tech-heavy Nasdaq Composite advanced 1.3% to 2,311.

Overnight the Japanese market was almost flat, nudging up 0.1% to 13,354 while in Hong Kong, the Hang Seng was also virtually unchanged with a 12 point gain to 22,753.

This morning Brent spot was trading at $124, spot gold at $930, silver at $17.41 and platinum was at $1763.

In the forex markets this morning, sterling was trading against the US dollar at 1.9855 and against the euro at 1.2644. The dollar was trading at 0.6369 against the euro and 107.66 against the Japanese yen.

And this morning, budget carrier Ryanair has warned that profit fell 85% in its first quarter to June 30th. Net income came in at €21m compared to analysts' expectations for €50.9m, according to Bloomberg. Sales, which rose 12% to €777m, were also lower than expected. It's not going to get better either; the group reckons that average ticket prices could fall by as much as 5% in the full year and it says it may make a loss of as much as €60m for the full financial year.