Seller confidence soars...prematurely?

Published 13th Dec 2007

December’s cut in interest rates has served to increase homesellers’ confidence, according to HAPI…

A majority of sellers have opted not to cut their asking prices in the belief that the IR cut is just the first of several and that the market will soon recover from the current downturn. This wave of renewed confidence in the market, coupled with a continued surge in 3+ bedroom properties delayed by HIPs legislation, has resulted in a rise of 1.1% for the mix-adjusted average house price in England and Wales.

However, sellers’ confidence in the market may be misplaced, since mortgage lenders, still in the midst of the credit crunch, have given no indication that they will relax their lending criteria over the coming months.

The HAPI for England and Wales has risen 0.9 index points to 106.5 in Q4 [May04 = 100].

Over the last 12 months, Asking Prices for homes in England and Wales have risen 5.8%, ca. 3.7% above the CPI, ca. 1.6% above the RPI and ca. 1.7% above the AEI (excluding bonuses). The mix-adjusted average price of homes in England and Wales, advertised on the open market, now stands at £259,721. Year-on-year (YoY) growth in asking prices for England and Wales has recovered slightly from a dip of 4.9% in August 07 to 5.8%.

Regional Analysis
House price growth in most regions of England and Wales has been stifled in Q4 by adverse market sentiment. Confidence remains strong in East Anglia and the West Midlands but has weakened in Scotland, the East Midlands and Greater London.
The remaining regions have suffered small gains (annualised rates being lower than the RPI) or losses. Notably, house prices in the North have fallen 1.9% in Q4.

Asking prices peaked for the West Midlands in October following a long rising run of gains but market sentiment in this region appears to have cooled in recent months. The West Midlands regional index has increased 5.1 points since December 2006.

Irresponsible lending
The Bank of England’s cut in interest rates on the 6th December came as a surprise to some and welcome relief to many in the housing market. A surprise because the current CPI data at 2.1% is above the stated target of 2.0% and relief for those that hope mortgage lending rates will also fall and therefore reinvigorate the housing market.

The cycle of interest hikes began in the US (followed by the UK) as the Fed and other central banks around the world tried to get to grips with inflationary pressures which were beginning to loom large on the horizon. None foresaw or would have wished for the banking crisis that ensued; their forward predictive models failed.

The Credit Crunch, the monstrous consequence of irresponsible lending and mis-selling of that debt, is now threatening the existence of some of the world’s largest financial institutions. Given that the BoE’s Monetary Policy Committee failed to foresee the current catastrophe, we can only hope that their current course of action isn’t just a panicky measure that lets rampant inflation destroy what is left of the UK economy.

A worst-case scenario could be that the MPC are tempted to inflate their way out of the Credit Crunch, as inflation erodes debt and capital alike, to the detriment of all UK wage earners.

Possible upside
Of course, a possible upside to making credit cheaper again (the market expectations are that rates will be cut to around 5.0% in 2008) is that house prices may not suffer large nominal falls. The logic is that cheaper mortgages would tempt more buyers back into the housing market and create sufficient demand to keep prices high.

This is regarded by some as the answer to the current stand-off between buyers and sellers. However, in the present climate of caution lenders may not wish to follow the BoE’s lead and lower their mortgage rates accordingly in view of the risk in a shaky market. Indeed, perceived risk is a key driver in the mortgage market where many lenders have withdrawn products and increased loan-to-value ratios.

Higher stakes
It is likely that the outcome of banking crises, such as that we are currently experiencing, are beyond the scope of any predictions based on financial models. The Boer, for all its elaborate reporting, may simply be ‘shooting from the hip’, hoping to prevent any more bank runs and save the UK economy from a depression.

Growth in UK GDP has been fundamentally coupled to growth in the housing market over recent years, so attempts to breathe life back into it are understandable. In 2005 the MPC voted for a 0.25% cut during a minor downturn and the market took off again at breakneck speed.

This time it’s different: the stakes are so much higher and the UK Government has a multi-billion pound vested interest (loans to the Northern Rock) in resuscitating the housing market cash machine.

Source: ' Move Channel Ltd '

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