News Review: Economics
Interest rising in rising interest rates
by Fionnuala Earley, UK consumer economist, Royal Bank of Scotland
the european central Bank took the plunge at the april meeting and raised the eurozone benchmark interest rate by a quarter of a percentage point to 1.25%. it was no big surprise -
the president, Jean-claude trichet, had signalled that this was likely to happen. the return of the phrase “strong vigilance” after the march ecB meeting was as strong a signal as any that rates would increase in april. But how long before the uK will follow? after surprisingly strong
inflation of 4.4% in February we might have expected there to have been a bit more suspense before the monetary Policy committee announcement.
two things explain why most
economists didn’t expect a rise. First, new data in the
week before the meeting showed just how hard things have got for households. inflation, taxes and low earnings growth have eaten away at spending power so much that real household disposable income fell by 0.8% in 2010. this is the first fall since 1981 and only the sixth since records began over 60 years ago. the second is that
changes to taxes and benefits in april will hit pay packets. the mPc will have been sensitive to the impact that an increase in debt payments on top of tax and benefit changes could have had on confidence. But the dark secret was march’s inflation figure. the mPc had early sight of the number and probably breathed a collective sigh of relied when they saw it had fallen to 4%. it’s unlikely that there was any change in the
voting this time but there will be “strong vigilance” in the uK too. We think they will wait until august before taking the plunge. So far low interest rates
and the fact that two thirds of borrowers are on variable rate loans mean that most households have been able to struggle through the hard times. any increase in rates will hit about six and a half million uK households, but a quarter point rise would mean that payments were still about 30% lower than in 2007. a rise to 3% would bring payments up to 2007 levels but in an economy with higher unemployment and lower disposable income, that would be much harder to bear. the
increase in
remortgaging shown in the latest Bank of england numbers is a comfort in this regard, but remortgaging is still very low at about half of the long run average. uK homeowners have always
The plight of the first-time buyer
The number of first-time buyers in 2010 was less than half of the level 10 years ago, and there is no sign in 2011 that they are returning to the market. Their absence affects the market not just because of their own activity but because they are often the crucial link in a chain of other transactions. So how long before they will return?
David Miles, a member of the MPC with a particular interest in housing matters, gave some clues in a speech to the Home Builders Federation.
Higher deposits take longer to save up and, unless lucky enough to have help from elsewhere, this will delay first-time
22 mortgage introducer MAY 2011
buyers’ entry to the market, he said. In Miles’s example, an increase in the deposit requirement from 5% to 10% could delay entry by about four years and bring the average age of a first-time buyer up from 32 to 36.
Because of the importance of first-time buyers to liquidity this delay will depress total transaction levels for a similar period. Of course other things will affect how long this delay will be in practice – house price movements, earnings growth, savings rates and help available from elsewhere, but the simple example is a good illustration of the importance of first-time buyers.
been seduced by the lowest up front price rather than looking ahead. But that’s only part of the reason why they have stuck with their variable rates. uncertainty over how long it will be before rates begin to move up, and by how much, is another.
London prices buck national trend
Consumers still think that UK house prices will continue to fall – by 1.1% in the next six months according to Nationwide’s Consumer Confidence Survey.
They’ve been saying this for the last four months and the sentiment is shared by most surveyors. Except for those in
London. London is the only place in Britain where more surveyors believe prices are rising rather than falling and also the only place where, on average, they don’t expect prices to fall in the next three months.
The sales to stock ratio, which is a good leading indicator of house price growth, has also been stronger in London and the South East than in other parts of Britain, which suggests supply is more of an issue here.
Foreign investment may be another explanation but London isn’t immune from the austerity measures, so we shouldn’t expect its market to become completely decoupled from the rest of the UK.
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