As 2007 closes, following an unprecedented situation in the money markets since August, Ray Boulger, senior technical manager at John Charcol, said:
Bank Rate in 2008
“The December Bank Rate cut will need to be followed up by one or two more cuts early in the New Year to address the current increasingly worrying economic impact of the liquidity squeeze. Further strong co-ordinated action from the main Western central banks will also be needed to pump money into the system, over and above what has already been announced. With the Bank Rate – Libor spread at around 1% monetary policy is in practice far tighter than was deemed necessary in The Bank of England’s August Quarterly Inflation Report, since when the UK, and indeed global, economic situation has deteriorated rapidly.
“The fact that we are in uncharted territory makes it more difficult than usual to forecast interest rate movements more than a few months ahead. Not only has the Bank Rate – Libor spread been exceptionally high for several months, but the same applies to the two-year gilt yield – swap rate spread, which is also about 1%, although two-year swaps have still fallen about ¾% since their peak in July. A lot will depend on how the liquidity squeeze develops and so far the actions of the Bank of England don’t instil much confidence, although it is difficult to judge how much their strings are being pulled by the Government.”
FORECAST: Bank Rate will fall to 5% by mid year and will not increase during the year, although it might fall a little further. Bank Rate @ 31/12/08: 5%
Property prices in 2007
“Housing transactions have fallen by at least 25 per cent since the summer and also compared to this time last year. The introduction of Home Information Packs (HIPs) have definitely distorted the market in the second half of the year and may be partly responsible for the slowdown, with sellers seeing them as a pointless additional cost and most buyers ignoring them.
“Although buyers are much thinner on the ground so are sellers, as many who don’t need to move are not prepared to sell at less than they think their property was worth earlier in the year. This reduced supply will inhibit prices from falling very far but one contra factor that will increase supply a little in 2008 – and reduce demand – is the significantly tighter criteria and higher pricing in the non-conforming mortgage market. As a result some potential borrowers will be unable to get a mortgage, or if they can they will be unable to afford the rate they would have to pay. Some existing non-conforming borrowers will be unable to remortgage, or afford the rate their mortgage reverts to when the initial deal finishes, and they will have to sell or their properties will be repossessed.
“I predict the net result is that house prices will fall a little in the first half of the year - by up to 5% - but by June the fall in Bank Rate and an easing of the liquidity squeeze will stabilise the market, although it will still be very difficult for non-conforming borrowers. In the second half of the year transaction levels will improve and prices will partly recover, ending the year down 2%. As usual there will significant regional variations and also new-build flats in some city centres will continue to under perform in view of the over supply of this type of property as a result of the Government’s planning policy.”
FORECAST: Average house prices to fall by 2% in 2008.
What’s in store for first-time buyers?
“The good news for first-time buyers (FTB) is that in the buyers’ market we now have they are ideally placed to negotiate a good deal as they don’t have to worry about a chain behind them. They should watch the market closely for a bargain but no longer need to feel pressurised to buy now in case they can’t afford to do so tomorrow. Although a few lenders have withdrawn from the 95% and 100% markets most haven’t and with interest rates coming down affordability should improve during the year. The triple benefit of lower prices, lower interest rates, and in most cases a higher income, will significantly improve opportunities for FTBs. Recent improvements in the Open Market HomeBuy scheme, and the likely launch in 2008 of other shared equity schemes, will also help FTBs.”
House Price Indices
“With most of these there is too much focus on the annual percentage growth and not enough on the current situation. The annual percentage figures are significantly influenced by decisions people made a year ago, which is unhelpful when trying to assess the current market. Monthly figures are often volatile (just look at Nationwide’s for September – November) but I believe a better guide is to annualise the latest quarterly figures.
“Furthermore this needs to be done using real figures, not the seasonally adjusted, i.e. doctored, ones. Seasonal adjustments assume that the same seasonal pattern prevails from year to year but this is no longer the case in the housing market. At this time of year seasonal adjustments distort the monthly headline figures upwards and so the real situation is worse than the headline figures from Nationwide and Halifax imply. Nationwide helpfully provide their real figures each month as well as the seasonally adjusted ones, whereas Halifax only make their real figures available quarterly, and even then don’t include them in their press release.
“Nationwide reported annual house price growth down from 9.7% in October to of 6.9% in November. However, for the three months to November the real figures showed a rise of just 0.1%, which when annualised gives a figure of 0.4%. p.a. (Their seasonally adjusted figures for the last three months showed an annualised rise of 3.9%.) It is also worth noting that, based on the real figures, Nationwide’s November index is unchanged on the June figure.”
