House prices won't fall again for years
Low interest rates will support house prices until 2014, argues Harvey Jones. And he's not happy about it.
Just one thing has stood between the UK and a housing crash this year: rock-bottom interest rates.
By scything base rates to a 316-year low, the Bank of England has spared us a house price collapse, saved tens of thousands of homeowners from repossession, and kept the high street alive, by pushing more cash into homeowners' pockets.
If you think the recession has been rotten, just imagine what it would have been like if rates were 6% or 7%, as they were in the 1991-92 recession. It doesn't bear thinking about.
Low base rates are the reason every pundit who predicted a property collapse has been wrong. And as long as rates stay low, prices won't fall, and Cliff D'Arcy will have to carry on renting.
Three cheers for cheap money!
So what have low base rates ever done for us?
Well, they have given the average homeowner an extra 10% disposable income at a crucial time.
They have given breathing space to tens of thousands of heavily-indebted homeowners, slashing their monthly mortgage repayments and allowing them to cling onto their properties.
And they have saved the UK economy from a gruesome fate by sustaining confidence, spending and employment.
And three boos
But savers won't be celebrating. They are the unmourned casualties of the battle against economic meltdown. To the policymakers, they were expendable.
First-time buyers won't be too happy either. Low base rates have stopped prices from falling to more sensible levels.
Anybody (me included) who hoped the recession would reduce UK house prices to rational levels will also be unhappy. Instead they have been artificially propped up, to prevent the economy from falling into a death spiral.
And prices will stay artificially high for as long as interest rates are kept artificially low.
Expensive yet affordable. Say what?
In historical terms, house prices are still expensive relative to salaries. With the UK in its worst recorded recession, it made sense to expect prices to crash rather than rebound this year.
But low interest rates have made property relatively affordable, and as lenders gradually reduce their rates and soften their criteria, it might become yet more affordable.
Anybody who wants to buy a property but can't find a mortgage must be in despair right now, watching prices creep further out of reach.
Yes, cheap money is creating another property price bubble, our flailing economy apparently can't stay afloat without one. It's not pretty, it's not rational, but it's what's happening.
Unemployment isn't rising as fast as many expected either. That also convinces me that prices aren't dropping soon.
And nor are interest rates
The Bank of England's November Inflation Report says that any recovery will be fragile, and although inflation may pick up slightly next year, it could retreat again in 2011. The Bank will keep interest rates low until it is confident the economy and banking sector are fully mended, which could take years.
The result is that property prices will continue to crawl upwards. Nationally, they were up 3.1% in the three months to September, according to figures from the Department for Communities and Local Government.
House prices for first time buyers are rising fastest of all, up 2.7% in September to £147,517.
That figure depresses me. With youth unemployment at 20%, graduates burdened with massive debt, lenders demanding hefty deposits and property prices rising, home ownership will remain a distant dream for many.
The young are inheriting the worst of all worlds. I don't think that will make for an equitable or happy society.
What do you think? Ask other lovemoney.com members for their views using our Q&A tool.
So what do I do?
If you're thinking of buying, I can't see much point in delaying. Until interest rates rise, property isn't going to get cheaper (unless there is a second global economic seizure).
If you've seen the right property at a price you can afford, and can secure a cut-price mortgage, then go for it. You are taking a gamble if you buy, naturally, because prices could sink, but you are also taking a gamble if you don't buy, because they could float out of reach. And I think the second scenario is far more likely.
Don't overstretch yourself, and set money aside every month, to pay down your debt before inflation eventually returns and base rates increase. Adopt this goal - Cut the cost of your mortgage and pay it down early - to find out the best way to do this.
This may be a sucker's rally, but I believe it will continue for as long as money remains cheap - and that could be until 2014.
If you're going to get sucked into this rally, it may be better to succumb at the beginning than the end.
As I said, it's not pretty.
Plenty of people still believe a property crash is coming - feel free to rip my analysis apart in the comments section below. But don't ignore the colossal and distorting impact of low base rates.
More: Get a magnificent mortgage from lovemoney.com | Sell your home cheaply and get the best possible price
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Base rates may be low but mortgages aren't particularly impressive when you consider how far base rates have fallen: I fixed at 5.25% in 2002 when BR was 4%. With BR at 0.5% the best deal on offer is 4.44% . First time buyer offers are generally lousy--the people who've benefited most from low interest rates are existing homeowners who aren't active in the market. With the [i]trillions [/i]that have been pumped into the money supply inflation has to be a major worry, and people who are locking in now to these high mark-up trackers could see their housing costs double in a very short space of time just as their spending power collapses. Yes their debt will also be inflated away but anyone who lived through the '70s will tell you what a hair-raising ride that is---and we don't have the miners around to kick off the pay round any more. Real incomes will suffer--in many cases they are already as pay freezes and short working negate the benefit of low interest rates. House prices really are a minor issue compared to unemployment or inflation. They are not "artificially" high and nor is there a "rational" level for them to return to: they are what they are, so get used to it. The best hope for those who dream of somehow being gifted the house somehow feel they are entitled is that prices will stagnate while salaries gradually improve. But if you really want a "dream house" then the best advice is not to sit around with your thumb up your bottom waiting for the ratios to be put right, but to go out and earn the money to pay for it.
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[url=http://www.timesonline.co.uk/tol/money/property_and_mortgages/article6926451.ece]http://www.timesonline.co.uk/tol/money/property_and_mortgages/article6926451.ece[/url] Mortgage rates up ahead of 'double dip'Lenders raise mortgage costs amid property fears "Government-backed banks raised mortgage rates and introduced stricter lending criteria last week amid concerns that this year's house-price recovery is not sustainable. Northern Rock, which has boosted lending in recent weeks, increased its market-leading five-year fix for remortgages from 4.99% to 5.39%, while the equivalent deal for homebuyers went up from 4.99% to 5.29%. Both require a 30% deposit. It also withdrew best-buy three-and four-year fixed-rate deals at 4.39% and 4.79% that were available exclusively via brokers, in an attempt to slow the flow of business." Read the article doesn't seem to confirm HOUSE PRICES ARE HERE TO STAY
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Surely the time has come where many degrees are overpriced?. Education is a service and needs the 'value for money' check. The degree system is used by the Government to keep youngsters off the unemployments lists. The debt of university is too high for the jobs available, generally. I believe education should be free, a country that is educated is successful. I went from school to a profession and became qualified through slogging at home. I was paid a pittance, but paid, and teh reward over a lifetime of work have been very good. We paid for an education of our children at University so that they had no loans, no debt. One got a first,but has cleared off to the USA, but we get talented Americans here. I do not think the graduate salaries reflect the high cost of the degrees, therefore something is out of balance. Frequently, the degree is just a start , you still need to qualify for maost profession in their own exams.
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22 November 2009