Mortgage & Housing

22nd December 2007


Managing Director, Worldwide Financial Planning, Writes:

It’s very easy for me to remain unemotional about house prices as I have neither an axe to grind nor anything to lose. Remaining detached allows you to look purely at the numbers. That’s what we have been commenting on it for eighteen months now. The truth is the bubble has just got bigger and bigger and the Bank of England (BOE) may well rue the chances they had to slow house price inflation and take a harsher stance before they have.

All the signs were there and with highly educated people continuing to tell me that this wasn’t a bubble like the last one, it was a matter of time before it popped. November had the biggest drop in house prices in twelve years. (1) So what? That headline, like those which drove people to continue to buy houses they couldn’t afford, is frankly unhelpful.

The message is clear however. The cost of debt has bitten hard and has taken a mouthful out of confidence. Once that’s damaged, it can turn to negative sentiment. At that point, it’s not pretty.

I agree with Neil Woodford’s comment a year or so ago that a house price fall of 30% would not be inconceivable.

Why do I say that? It was a bit similar to the stock market in 2002. I was asked on a radio station and this column if I believed the stock market had reached the bottom. I said it was impossible to forecast any of these issues but that a stock market would definitely turn at, or around, a point that it was considered to be cheap, i.e. priced lower than the real value it contained.

Sure enough, eighteen months later it turned at exactly that point. Whether the UK housing market turns before the ‘cheap’ value will be down to how aggressive the BOE is with interest rates, and how much they can maintain confidence and sentiment. It’s a sign of things to come that we are indeed hanging by that thread rather than true value.

I wonder how many of you will have kept the headlines cut out for all those banks with a vested interest who have been forecasting x% increase in a housing market over the last twelve months.

Whilst a number of institutions have commented to me that I am anti competitive with my comments about the housing market, I don’t see it like they do and don’t have the vested interest. I see a tree as a tree and report it as such. The sting however is in the tail.

Let’s consider three real problems the BOE has now: Oil and food costs are still driving inflation, forcing the BOE between a rock and a hard stone. Inflationary pressures mean they cannot ease interest rates as they should to support the housing market and domestic spending;

Two million customers will come out of a fixed rate in the next eighteen months.(2) That will be expensive. If you are coming out of a fixed rate of 4.5% and onto a standard variable of 7.25% that would mean a monthly payment increase of 58% from £475 to £725, a point we made eight months ago. This will not have gone amiss which may well account for the lack of through put in estate agents at the moment. Whilst some talk of house prices, I have never walked past a house with a sticker on the side of it saying what its worth. In any event what it’s now worth is of no relevance as, what it’s about to do is the key;

So why have none of our so-called experts pointed out the most damaging issue to the housing market. Supply and demand is the biggest driver. Let’s look at that trend. In June this year there were 5.75% less completions than the year before. In July it was 6.1% less than the year before, and August (the last published figures) was a staggering 10% less. (3) Interest rates are on their way down and expect one before March! 


For advice on the best mortgage rates call or if you have a financial query call Peter on 0800 0112825 or e-mail info@wwfp.net and take a look at our mortgage section.


¹  Nationwide 
²  Standard Life 
³  Land Registry




Peter McGahan is an Independent Financial Adviser and the Managing Director of Worldwide Financial Planning Ltd who are authorised and regulated by the Financial Services Authority.
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