The housing boom will end in 2008 - it's official

The Council of Mortgage Lenders has warned that house price growth will slow to below the rate of inflation next year. Will the announcement scare the Bank of England away from further rate hikes? asks John Stepek.

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It's official. The housing boom will end next year.

The Council of Mortgage Lenders has warned that house price growth will fall to between 2% and 3% in 2008. In real terms, given that inflation is more than 3% just now, that suggests prices will fall.

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Of course, lenders and estate agents have learned to hit the panic button hard while the Bank of England is hiking interest rates. The hope is that they can somehow scare the Monetary Policy Committee into veering off course.

But somehow, we don't think their influence is as great as they wish it was

The Council of Mortgage Lenders has cut its forecast for 5% house price growth in 2008, to 2%-3%. The move comes in reaction to higher-than-expected interest rates.

Director-general Michael Coogan said: "I don't believe there will be a crash, but clearly a slowdown is more likely in an environment of higher interest rates."

As the CML points out, people who took out two-year fixed-rate mortgages in 2005 (when the base rate was 4.5%) will have to find at least another £100 a month to fund their payments when they re-mortgage. That of course, means they have less money to spend elsewhere, which is bad news for retailers.

It seems a very downbeat outlook from a group which ultimately depends on a healthy mortgage market for its living. Shouldn't it be trying to spin the news as positively as possible? After all, it wouldn't be hard. So far, the various house price surveys aren't showing much of a slowdown at all. Nationwide said annual house price inflation rose to 11.1% last month, while government statistics from the Department of Communities and Local Government (DCLG) confirmed strong growth in May.

But as we pointed out above, the likes of the CML and other property groups have learned to cry wolf' early on interest rates. The fact that the Bank of England cut interest rates back in August 2005, just as annual property price growth had almost flat-lined, has given the housing industry as a whole an inflated sense of its own importance in the great economic scheme of things.

You just have to listen to the tone of hysterical warnings from property pundits across the land, warning the Bank not to overstep its remit. We already took a look at the over-the-top reaction to the last rate rise (see here for a reminder: The end is nigh for soaring house prices).

But even though estate agents might hate to admit it, there's more to protecting an economy than making sure that house price growth is rising at a double-digit rate. In fact dare we say it rampant house price inflation is probably a sign that your economy is dangerously imbalanced and that you're saving up trouble for the future.

The Bank's main concern is inflation. Its actions so far have been designed to keep a lid on rising pricing pressures. Of course, as my colleague James Ferguson is rightly fond of pointing out, the Bank's already behind the curve when it comes to inflation. When inflation was last at these sorts of levels, the Bank thought an interest rate of around 7% was more appropriate that's higher than almost any forecaster is currently contemplating.

(For more of James's thoughts on inflation and what the bond market is telling us, read the current issue of MoneyWeek. )

The Bank, optimistic and wrong-headed as ever, is hoping that inflation will ease off. It is expecting the impact of high oil and food prices to wear off soon just as it has done for at least the past two years.

But as Capital Economics points out, the latest surge in oil prices and strong food price inflation may scupper that. High oil and food prices of course, will make the headling consumer price index (CPI) inflation figures worse. But more importantly, they will also put pressure on underlying inflation manufacturers will keep trying to push through higher costs to retailers, who will in turn try to push them onto consumers.

"If the MPC was hoping that a short sharp fall in inflation would bring inflation expectations back down quickly and dampen any danger of a rise in wage pressures, it may well be disappointed," say Jonathan Loynes and Paul Dales of CE. "It may now have to do more of the work itself by slowing the economy through higher interest rates."

The property market experts are right to be worried. Unfortunately for them, they're no longer the Bank's biggest concern.

Turning to the wider markets

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In London, a strong performance from banks including Alliance & Leicester yesterday failed to offset heavy losses for the mining sector. The blue-chip FTSE 100 fall 19 points to end yesterday at 6,697. Lonmin was the day's biggest faller, tumbling nearly 7% on warnings over platinum production problems. For a full market report, see: London market close.

On the Continent, the Paris CAC-40 climbed 7 points to end the day at 6,125 with banks including BNP Paribas leading the gains. And in Frankfurt, the DAX-30 was 12 points higher, at 8,105.

On Wall Street, the Dow Jones notched up a new record high close of 13,950, adding 43 points as takeover speculation boosted telecoms stock Verizon. However, the S&P 500 closed down 3 points at 1,549 and the tech-heavy Nasdaq dropped 9 points to close at 2,697 ahead of this week's key earnings.

Yesterday's earthquake in northwest Japan led to a slump amongst Japanese insurance stocks. The Nikkei was down by as much as 21 points to 18,217 today. And the Hang Seng was up 129 points to 23,083 in Hong Kong.

Crude oil had fallen to $73.96 this morning, whilst Brent spot was at $78.90 in London.

Spot gold was last trading at $664.60, off an intra-day high of $665.15. (For a more in-depth gold market report, see our section on investing in gold). Meanwhile, silver was down to $12.92.

In the currency markets, the pound was at 2.0412 against the dollar and 1.4804 against the euro. And the dollar was at 0.7250 against the euro and 121.79 against the Japanese yen.

And in London this morning, the Office for National Statistics revealed that UK inflation had fallen to 2.4% in June. The year-on-year increase in CPI is less than May's rate of 2.5% but above analysts' forecasts of 2.3%.

And our two recommended articles for today...

Can a dollar devaluation be avoided? - Recent days have seen the dollar sink further against both the euro and sterling. Meanwhile, China has reported its biggest-ever trade surplus whilst America's deficit continues to grow. For more from Jeremy Batstone on what the changing make-up of the global economy means for the dollar - and the one thing helping the US avoid a full-scale balance of payments crisis, click here: Can a dollar devaluation be avoided?

How to profit from oil's new highs - Blame it on Americans making Summer trips to the beach, the war in Iraq, or strikes in Nigeria - but whichever way you look at it, supply and demand dynamics mean the oil price has been creeping back towards last year's all-time high of $78.40 a barrel in the past week. To find out some of the cheapest, most efficient and low-risk ways to cash in on the rising oil price, click here: How to profit from oil's new highs

John Stepek

John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.

He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.

His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.