646 Cover

How precarious are markets?

28 June 2013 / Issue 646


  • The truth about UK house prices
  • Profit by buying the world’s worst stocks
  • Traitor or hero? America’s most wanted whistleblower


Merryn Somerset WebbEDITOR'S LETTER

Merryn Somerset Webb

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.

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.

• Read the full editor’s letter here: Now we’re listening.