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eZine Issue 8
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Market Rates
Interest rates The discussion now is not "how much?" but "when?"; not "which direction?" but "what next?" After the unsettling performance of western stock markets in recent weeks, and the expectation of further volatility; after the near-collapse of Northern Rock and the uncertainty of whether there will be further casualties, the Bank of England’s next move is eagerly awaited by the markets. The fact that the Federal Reserve has lowered US interest rates by half a percent makes it less likely that our UK rates will go up to 6% before Christmas. Or so you might think. But discussions over the last week or two suggest that the link between the Bank of England official rate and mortgage rates is loosening. Even if official rates stay the same or even go down, this no longer guarantees that mortgage rates for new borrowers will follow suit. Indeed, mortgage rates are already showing signs of increase, though admittedly small and by no means widespread. It seems quite likely that lenders’ criteria will tighten, particularly in the areas of LTV percentage and status. Ok, I don’t have a crystal ball, but the market, imperfect though it may be, is showing 3-month Libor at 6.75% and 6-month Libor at 6.60%, both a tiny amount lower than a month ago. Three-month Euribor is at least 0.75% above today’s rate and so is 6-month. Sterling 3-year swaps are around 5.72% and 5-year at 5.59%, however. On that evidence, rates are not expected to stay at current levels for very long. The heat in the present market is not expected to last. House Prices As we discussed in the last issue of VIewpoint, the performance of house prices does not contribute directly to CPI, the primary measure used by the Monetary Policy Committee to monitor inflation. But the reverse is quite different. Changes in interest rates (used to control inflation) can have a significant causal effect on house prices. Higher interest rates can cause a lower level of price increase, even if not necessarily a decline. But picture this. Suppose the national rate of house price increase is running at 9%, influenced heavily by a rate of 16% in London. So much so that in many areas of the country, for whatever reason, the increase is between 0 and 5% - like now, for instance. In order to cool the London market (if that’s what you want to do), mortgage interest rates could be increased. But that would have a disastrous effect in those areas which are already static. You shouldn’t penalise Carlisle to solve London’s problems. The country is a whole series of micro-markets, each having different characteristics, so a single interest rate policy is not a good panacea. But you can’t have one interest rate in Bolton, another in Cardiff and yet another in London, even though that might be a more precise way of influencing markets. If you think that’s bad, substitute Germany (or France or Spain or whatever) for London in the previous two paragraphs! Fundamentally, markets are influenced by supply and demand. Demand is created by all sorts of factors: real, imaginary, emotional. Supply is supply, though it too can be manipulated. Any changes can take a long time to produce an effect. Who’d be an economist? I think I’ll stick to sky-diving. It’s less exciting, perhaps, but the consequences of getting it wrong are more predictable. Currencies The currency markets have been convinced that UK rates would rise again, hence recent peaks of $2.0654 for a £ - a 26-year high. The fact that this has since eased below $2.00 and now hovers around $2.00 (as I write), even though US interest rates have shed a full half percent, suggests that our rates are expected to stay the same or even ease a little in the next couple of months. So, if you are buying property off-plan whose price is fixed in US Dollars, now would still be a good time to talk to your currency company about buying dollars forward. You may get a better rate after the September meeting, but nothing is guaranteed! Although we are continually bombarded with predictions of house price melt down, we should never forget that, whether it happens or not, the key is to buy below market value. To rely for your profit on the market as a whole increasing will never give you that extra wealth you are seeking. In the hunt for BMV (below market value) opportunities, one of the best places to look is the off plan market, increasingly overseas. We can help you in your search! Forthcoming Dates:
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