Rate rise to trigger house price crash?

Worries over inflation and a resurgent housing market have forced the Bank of England to raise the cost of borrowing to 4.75 per cent, the first increase in two years. Interest rates are now 1.25 percentage points higher than three years ago. Analysts said the rate rise would reduce the demand for mortgages, taking some of the heat out of the housing market. The Bank hinted that rates could move higher still, leading some economist to predict a potential crash in the property market. Ed Stansfield, of Capital Economics, said: "If rates go up another two or three times we might see a substantial house price correction."

How do you think higher rates will affect the housing market? Have your say below.

Comments

[Mike Davies]

Affordability isn't a problem because interest rates are rising - it’s a problem because houses are ridiculously overvalued.
The main reason they are ridiculously overvalued is because monetary policy has been too lax, allowing people to borrow enormous sums of money to chase house prices higher.
Therefore, this initial rise in interest rates should help put a cap on house prices, or perhaps even bring them down a little. And any further hikes are likely to bring prices down even more.
So even though first-time buyers might not be able to borrow as much, they’ll find their hard-saved deposits buy them a bigger chunk of house.

[nigel]

Yes the rate rise will halt the housing market ,but its already too high ,first time buyers can`t get on without taking too many finacial risks ,the buy to let buyers will soon dry up i still remember the dot com bubble and this look like another bubble imo.

[Sarah Marquis]

Well, my dreams of owning my own home have once again been shot down in flames. We simply do not have the wherewithal to buy. The casual comment that £21 per month extra isn't much I find quite offensive, living on the brink every month, where money can just about be stretched to meet our needs, £21 represents the difference between proper meals or cheap homemade sandwiches for dinner.

[Simon]

I heartily concur with Sarah's comments! In fact the financial world associated with house purchases is way beyond a lot of people's abilities, and I strongly suspect this truly unfortunate situation has been the product of rampant, un-checked greed on the part of estate agents, banks etc. It is an extremely unedifying spectacle.

[Steve]

Unfortunately I suspect the interest rate rise will do little to halt the upward surge in house prices which is (I suspect) at heart driven by greed. Greed of banks who are perfectly happy to allow people to get up to their necks (and higher if possible) in debt, with massive 100%+ mortgages-because after all "Your debt today is their profit tomorrow"-thanks to the increasing interest rates on the repayments. Greed also of certain home-buyers who hope their 200K property this year will be worth 240K next year! What is truly sad is that the whole thing has generated so many losers and really so few winners-mainly amongst the super-rich! You can be a loser by being one of the great many who cannot now ever afford to get onto the property ladder, or alternatively perhaps you are on the ladder but have so much mortage debt as a consequence of the rising prices that you haven't even the faintest hope of paying it all off. What a lamentable state of affairs!

[Tim Miller]

I got out of proerty in 1998 six months befor the crash, I sold 8 properties then. It looks like 2007 will see another crash, buy to let owners will put property on the market which will only make falls bigger this time round. I think a lot of people will lose a lot of money. If a global event does not kick this fall in prices then simple maths will be enough, it's when not if.

To all those not able to afford a home, don't worry, save your deposits and buy cheap in a few years.

[Paul Fisseden]

This situation is repeating itself. Until the inept government stops the financial institutions from overlending nothing will alter. 135% mortgages that abound in the UK are a shock for the rest of the world. The public will continue to take the brunt of the increasing debt burden that allows the government to cover up their failings. It won't happen as there is no imputus for the public to see that the outcome will only be one way - a downward spiral of debt and misery for those with nothing to fall back on. Carry on spending while you can. Live today sod tommorow.

[Nick]

Just think that when you're tucking into your 'homemade sandwiches', that the 5 big banks have made a £19bn profit. Perhaps there should be a way of capping the greed of banks at the expense of their customers.

There's nothing greedier than the financial industry, at any level.

[Alan Tayler]

The Bank of England is playing with fire with this precipitate rate increase. The only two economic elements that have helped this country avoid the general recessionary influences caused by the Dot com Millenium crash were the huge increase in public spending Gordon Brown has presided over, and private consumption driven by rising house prices. The Chancellor has now effectively run out of money and is trying to rein in public expenditure. This month's rate hike was decided by the bank's own mandarin/academic majority in a needless attempt at 'shocking' financial responsibility into the economy. This is largely redundant since dramatically increased energy costs were already biting into disposable incomes, depleted as they were by other large service cost increases. The repossession and bankruptcy statistics also serve as substitute alarms against profligate spending.

What the rate hike will do is cause stasis in the property market and a directly related slump in the retail sector. How so? Simply reflect on what happened two years ago when there were two consecutive quarter point rises in the base rate. The property market went dormant and retail suffered badly until well after the rate cut of August 2005. The current difficulty is exacerbated by the media already talking of the possibility of yet more rate increases. The public see the ominous threat of apparently limitless increased borrowing costs and react by drawing their economic horns in. Quite how tipping the economically marginal, highly borrowed, over the edge will help the economy is a mystery.

The irony of course is that whereas property should be a function of an economy’s strength, in this country’s case it has as a matter of policy become its mainstay. The savings ratio has been whittled away and been substituted by reliance on bricks and mortar. Pensions, through inept government policy or interference have been decimated both at the company and individual level; to be substituted again rightly or wrongly by bricks and mortar. The entire ‘feel-good factor’ now depends on house price performance. By tampering with this the Bank of England will if not learn, at least experience, the reaping of their own whirlwind.

[cheekoo]

given that the rate rise falls at the same time as a lot of annual cost of living pay settlements, I suspect that the rise in base rates, once passed on to borrowers, will just eat up into those pay rises. So I think the rate rise will just make home-owning consumers a little bit more cautious and stop them spending on non essentials rather than panic sell their home and cause a property market crash. We would have to see a quick succession on interest rate rises with little pause in between each step, coiciding with a lot of job losses, to start seeing panic of any sort.

[David Coates]

about bloody time- should be 10% - when I had a mortgage it was 15%- now I am a saver and need the interest it is pitifully low!
It is too low and makes for too high house prices- makes the banks rich and increases
Gordon's stamp and IHT taxes - but it is not real and people are borrowing against a myth that will end in tears and 3rd generation mortgages!

[Paul Boughen]

This interest rate rise coupled with the ever increasing utillity costs mean all households are facing an ever increasing pressure on their incomes.I am self employed and the only breadwinner in my family, and finding it harder and harder to earn the living we are accustomed to.Other than my mortgage i have virtually no debt, but still struggle week by week.

[vijay sahota]

A rise in energy costs (dont believe them when they exclude energy from core inflation/ are not a 'one off' any more they are here to stay and therefore should not be excluded from the government's inflation numbers. So what im trying to say is that rates will go up as a result for the forseeable future. This may finally bring the income to house price ratio currently at 6 in the UK back to its historical averages of 4.

If it does, we in line for about a 30% correction in home prices.

[walley turnbull]

Why are house prices exempt from CGT? Perhaps if CGT was applied to all houses then we would not be in this mess with potential first time buyers unable to get on the 'ladder'. Yes, I would definately be effected, but if you have made the 'windfall' gain why should you not pay tax on it?

Walley Turnbull

[Ben Cowell]

There may be no housing crash, but just a steady drift downwards, as interest rates and inflation eat in to those gains that householders have achieved. I would not buy property now, it’s over priced like so many assets. In fact I dont think I can bring myself to buy anything. Maybe the odd stock pick and more gold! If was advising anyone who is not on the property ladder, I’d say give it a few years, to see how the world economy pans out. I'm quite bearish, but then I have been since 2002. Just get out of dollars, and in the medium term sterling, but again I said that two years ago. It’s all about timing, but as my farther used to say, you can never get out at the top, you’re either early or too late!

[Neils]

House prices should be forced to come down as it's almost impossible for first time buyers to get on the ladder without putting themselves at too much risk. This should be done by putting limits on borrowings.

[Pete]

Up, Up and Up seems to be the trend in the value of everything, except for my salary that is, the two are certainly not in direct relationship to each other at any rate! More importantly as I am currently trying to join the property owners club living in Greater London I am well and truly limited in terms of choice. Not wanting to purchase whatever I can afford (currently a bedsit - i love the way these are called studio apartments these days!) I am sitting on the edge of my seat waiting for the property bubble to burst. Sounds harsh considering a lot of my friends have just joined this prestigeous club and would no doubt be dealt a nasty blow. However something has to change, please for the sake of my cat, make it change! For now, i'll sit back and see what happens. Miow.

[michael]

hooray !! I've been waiting for this rate rise for ages & can't wait for the next as I'm a first time buyer...I fill sorry for first time buyers who bought recently as properties are well overpriced & are soon going to have a big shock....This is a false economy that needs to correct it self..message for all you first time buyers, "DON'T BUY JUST YET", it worth waiting now.

[derek bevan]

There has been so much cheating and lieing, deceipt and ripping off in this the overall economy,now the chickens must come home to roost.What became of the investigation into the borrowing ratio,incomes not being a third of loan ?
ie "real" average net income being £14,000,but £42,000 property impossible,BRING DOWN THE PRICE OF LAND,now in the region of £100,000 per plot.

[Pamela]

The mad buy to rent market is partly to blame for the price hikes. The increase of single parents is also another reason.
The rise in interest rates is right - effective in slowing down the speculative market. The fact that rates have remained unchanged for so long has led many into false security. What goes down can also go up and vice versa. It is folly to think that one is safe and on a definite path to riches, having bought a property.

[Malcolm]

The housing market in central London will not be affected buy this small increase in interest rates. Most of the buyers are cash-rich internationals that don't need mortgages. I have been visiting estate agents in Kensington and Chelsea all week with a view to buying myself another house there, and they are all desperate for properties as they have a lot of demand and not enough properties to sell. This is the reality. For the next 6 months prices will continue to spiral upwards. The estate agents that I have spoken to predict another 10-15% rise this year. Macro-economic factors will probably bring down prices eventually, but in my opinion and in the opinion of many others we are several years away from this happening.

[rupert]

the only way to stop house prices increasing is to build more houses, appartments and houses need to be built all over south east england as for central london there is a whole new group of eastern european investors buying property in london new money is flooding in from the east, in Prague estate agents are starting to advertise central london property.

[jonathan]

While interest rates are very low historically and unemployment is low then the housing market will continue to flourish. Tough for first-time buyers sure, but it's been like this for years

[Claire]

I am a first time buyer and I am pleased that the interest rates have gone up, I can only hope that they rise even more so that I can buy a home. I am over 30 and desperate to start a family, but cannot afford to buy or *rent* a suitable home. I cannot understand why this government has not intervened to stop prices rising out of control. There should be limits on how much people can borrow and also property limited to British citizens as it is in other countries. A stricter control on rents would also be welcome. We have no future in the UK.

[Cheryl]

I have a growing family and need more space for them to grow, I have no room to extend so must move on, but can not afford a new morgage on my salery unless I work until I am 70. When I have seen my parents retire in their 50's but do not live close enough to help me. I realise how lucky previous generations were. Even if interest rates did go very silly under the last Labour Gov.

[Andy]

Well if there's more interest rate rises at least I can look forward to reading more idiotic editorials from the times property editor, explaining how your children will now have to go without treats because those nasty people at the bank of england have raised rates, and not, of course, because you borrowed more than you could afford and couldn't cope with a single 1/4 point interest rate rise. Honestly, where do they find these people...

[roger]

people have to get burned or there would be no profit to oil the wheels, houses have become a commodity so are subject to the same forces.bad luck if you need somewhere to call your own, at the moment.

[tracey froude]

As 1st time buyers its been really hard trying to get on the property ladder so for us its really great news.If house prices do go down at least we have some chance of moving on in life.

[Liz]

I've sold my "first time buy" London property which I had an interest only mortgage on for 18 years....I have lots of equity but even so I've left it a bit late I guess to put my original plan into action which was to sell out of London and buy cheaper in the country....Its all too expensive in the country too! I completed in June and still no sign of anything I'd want (or rather afford) to live in.
Roll on interest rate rises if it has the effect of a property price crash thats what I say!

[James Smith]

I have just been offered mortgage equivalent to seven times my salary with a promise for more!! Building society which is offering me mortgage of this size is saying "if i don't buy now I never will" as they expect prices to double over next few years with their landing criteria. Good for them! I am going to buy shares in this building society.

[Haroon Abbasi]

What most people don't realise it that there is huge pent-up demand underpinning house prices and wholly inadequate supply especially for family sized houses in the suburbs. I own a buy-to-let property in c.london and am presently renting a larger house further out for my family. Renting is much cheaper than buying but I would definitely prefer to own rather than rent because a rented house just doesn't feel like a permanent address. I pay £1,300 monthly rent for a house that would cost me around £425k to buy! Moreover with a growing family, my wife and I just don't feel "settled" while renting and, of course, can't decorate the house as we wish. I don't believe there is a general shortage of property per se, otherwise rents would be dearer. There is however a shortage of property for sale at a time when ownership is becoming an evermore desirable good.

Part of the reason for inadequate supply is investors holding on to second properties. I think the chancellor could possibly remedy this with one novel change - abolish CGT on the sale of second properties. This may sound counter-intuitive as property investment would become more attractive. However, the flip side is more properties would change hands as investors cashed in their gains. To prevent new speculative buying the chancellor could make the CGT exemption only apply to investment properties purchased before a certain date say 1st January 2002. This would immediately remedy the supply imbalance and I believe prices would quickly moderate.

One other aspect of inadequate supply people often miss is caused by growing life expectancy. So many large properties are occupied by the elderly and clearly the longer people live the fewer of these properties come back onto the market. I can't think of a solution to this problem that wouldn't include some element of cruelty! However, certainly in the area I live this is a big problem.

Finally, the chancellor should also address stamp duty, as at the current level, it is a tax on mobility. People would definitely move more often if the one-off purchase costs were much lower, and this would improve property turnover (liquidity).

I think people shouldn't get over focused on macroeconomics when talking property but try to understand the demographic and lifestyle factors underpinning property ownership. The best way to solve the crisis is for the chancellor to modify the tax system so the availability and turnover of property increases dramatically.

[John Kidd]

An overseas perspective to this debate. In 1975 before going to live abroad I sold a modest three-bedroom 1920s house in an attractive south Devon village for 12,000 pounds, then about four times the average UK salary. As the value of the house had doubled in ten or so years I was quite happy with the price achieved.
Last year I revisited Devon (as attractive a county as ever) and noticed that the 2005 asking price for that house was over 300,000 pounds, about fourteen times the average local salary level. Needless to say and even if I had been able to afford it I was not tempted to repurchase the house at that price! Maybe I should never have sold it in 1975! More seriously, however, I am told that it has become almost impossible for Devonian would-be first home buyers to buy locally at all. Perhaps for their sakes a substantial house price "correction" is desirable as well as being essential.

[John]

Real estate markets are crashing in England, Australia, America, New Zealand and Canada (except oil rich Alberta). No amount of chatter can stop the inevitable crash of a pyramid scheme.

[Leah Luxon]

Hurray the house prices may drop!! Soon I can buy a decent property where i dont have to worry about having my car being pinched off my drive.
I was worried I would have to get pregnant, quit my job and go down the dole house to get a place!
Now I can remain a decent hard working person and get value for my money!

[Steven Lust]

Interest rates would still be historically low even if they were to rise to 6%. Anyone worried that a few quarter point rises now are going to tip their finances over the edge must have either had a very short memory that interest rates were around 7% 10 years ago and at one stage hit 15% during the ERM crisis, or they were ill advised on the history of interest rates. Look at the average fixed rate over 10 to 15 years, that should bring a hint of reality. Negative equity and repossesions are the last words you will hear from an estate agent. If you think there is such a thing as real estate price alchemy, you had better be ready to discover "fools gold".

[susan craig]

What I want to know is ....why were house prices factored out of the various inflation measurement indices years ago?-Had they been included "declared inflation" would be very much higher and as a consequence so would interest rates ----and many people would be spared the shake out which is on its way....

[Melissa Armstrong]

Is anyone going to bother to ask whether the figures from Rightmove are actually valid? Sounds like just a ploy to get some media coverage to me...

[M Brodie]

I'm tired of hearing from estate agents and the property PR brigade that interest rates hurt affordability. High prices are the culprit, not interest rates. A 0.25% rise may hurt households that have overstretched themselves and borrowed 100% or close to that of their home but most wise investors know that if you have to borrow so much that your interest payments far outweigh your capital repayments then you are making a bad investment. Renting is not the waste of money here - interest repayments are. If you rent, you have the use of the owners' (in our case, top of the range) appliances, equipment and furniture while the building is maintained at his expense. If you have a large mortgage, most of your repayments go on interest and yet you still have all the costs of maintenance and the initial outlay for appliances, furniture etc. Meanwhile a tenant who rents can put his spared costs towards a larger investment fund.

Banks and lenders currently have an ideal scenario for profiteering as people borrow more and more thus repaying the bank the original capital they borrowed numerous times over, in some cases. It's not about monthly affordability - smart investors should avoid interest repayments. That way you are protected from being exposed to the market. The way most householders now live is trapping them into eternal poverty. If you borrow to the hilt to afford the appearance of wealth, it just means that you essentially rent from the bank and make profit for those who are already wealthy beyond the norm.
The most infuriating thing about this never-ending house price explosion is that it is obliging everyone who would like to own a home, no matter how prudent, to borrow rather than to buy outright, exposing us all to capital markets and global economic trends.

[Chris Jones]

Over the last few years there has been a lot of focus on the settling of claims over the mis-selling of endowment-based mortgages (on the understanding that investments may go up or down etc etc - an informed choice?). Will current mortgage purchasers be able to claim for the mis-selling of policies in the future, based upon the fact that they are being sold financial products that the banks and building societies know are bound to place a huge burden on their customers? Can they be sued for giving poor financial advice (who could disagree that 100% + mortages, 6 x salary loans etc are of no benefit to the customer)?

[Tinecu]

The interest rate rise is about two YEARS too late. Money supply needed to be tightened then not now when inflation is already running away.

According to Home.co.uk House Prices were falling anyway!

See: http://www.home.co.uk/asking_price_index/

[Pat]

Please can we have the "feared" property price collapse? As soon as you like.

High property prices benefit banks, estate agents, builders and the lucky few who sell up and move abroad, but for the rest they simply mean we're paying through the nose to live in accomodation our european neighbours would turn their noses up at.

[Sue Wybourn]

Perhaps it is time for all of us to stop being so obsessed with property ownership. Owning a property is not an option for many people in the rest of Europe and you are not seen as a failure either. As a result rents are cheaper and more affordable. I have a 36year old French cousin who lives in the centre Paris, is well qualified, has a good job and a fairly well off family. Buying a property is still not an option. His rent is the equivalent of £350 a month. He comes to stay in London a lot and the cost of living is definitely higher despite salaries being higher.

If we continue to crave property ownership - there is a price to pay for this - debt that will be passed on to the next generations - is this really the legacy we wish to leave for our children. The only winners will be the wealthy and the banks and building societies surely?

In this 21st century young people need to be able to afford to leave home and afford the roof over their heads - whether this is a rented one or an owned one should be a secondary consideration.

[Jon]

With all the debt in the economy it is highly unlikely that the Government or the Bank of England will want interest rates to rise much higher. More likely is that they will allow interest rates to stay low and money supply to grow. This means inflation and lots of it. Anyone relying on a wage is likely to suffer in that environment.

The Government and Banking establishment will do everything they can to keep house market afloat.

[chris herrington]

There is one reason for house prices going through the roof the government wants it so. The government has used the planning laws to cripple the supply of new homes. Until people tell politicians the game is up, end this brutal nightmare or be voted out the politicians will use the loony house prices to raise tax, its a lovely trick make everyone think they are getting richer then tax the hell out of them!!! So dammed sneaky!!!

[Andrew David Kirby]

Labour and their rediculous mis-management of the economy should stop focussing on their fear of house price inflation as the reason for putting interest rates up, this only hurts the british public, retailers and exporters. House prices and their affordability for the normal person reached critical mass some years ago. More and more people are forced to rent than buy and this means that more and more buy to let investors here and abroad are piling money into this sector and driving house prices up further. And so the spiral will continue. Rate rises undoubtably reduce profitability but only for those landlords that have large mortgages. Sadly the measure used of investment landlords is on the quantity of buy to let mortgages, which are a very specific vehicle which some landlords are forced to take. For the majority of serious investors whose money is enough to drive house price inflation the interest rate rise will be of no consequence to their investment. It will merely be an inconvenience as their tennants find it increasingly difficult to find the rent, which may have a stabilising effect on the rental income but it certainly wont deter house price inflation. Tampering upwards with interest rates will cause an economic recession long before house prices "crash"

[Christina]

We sold a year and a half ago and have lived debt free since. We will buy again but Wimbledon prices are simply daft at present and we are content to wait. Renting is for us a very cost effective option allowing us to save in a way impossible with a mortgage on your head.

What most shocks us is how many people we know are so hopelessly over- extended (middle class professionals) that they have no pension savings. They rely on their properties providing their pensions when they eventually sell but that in turn requires house prices to continue the upward march. Personally I think we are set for a long downward trend in prices.

[Ian Richardson]

How long do we have to wait for everyone to realise that house prices are overvalued. Already this year we are told that people who have applied for insolvency has risen far greater than expected. The average household is in £10-15K debt and the average wage is around £25K. No wonder banks are raising interest rates, they have to claim their money back somehow, shame its not passed onto the savers. Lets face it, they want our debt not investment, the Estate Agents and Banks are the winners at this!!!

[Jon]

....The comments on here amuse me. The facts are 1) There are not enough houses for the population....need I go on? Raise interest rates too much and people lose thir houses thus making the lettings market stronger at which point the Buy to letters clap their hands and count their pennies. Lower interest rates and more people invest in buy to let.....given the fact that there is a deficit of houses in the UK and an influx of about 200,000 immigrants per year, there is never going to be parity. 1 in 4 mortgages are interest only, the idea of "generational mortgages" is being mooted, whatever happens, market pressures will continue to drive prices up, as they have done over the last 200 years...

[amy]

Im discusted by john's comments that by getting pregnant and going down to the dole office to get a house.
I am a single mother of a 7 year old and living with my parents.
I have gone on numerous lists with the council and have to this day not received a house.

[Ian Mumford]

It's all going to end in tears. There will be a property crash sooner or later in UK and USA. Prices are already unsustainable and Building Societies are not helping by increasing their lending to 4 or 5 times your salary.

Not an economist but l think the problem is the ridiculous mortgages that are on offer these days that allow the prices to go increasingly upwards whilst still appearing affordable.

Interest only mortgages should not be allowed as they give a false sense of ownership and unless a repayment vehicle is in place a lot of people who are buying are in big trouble in years to come.

When l first bought the maximum you could lend was 3 times your salary so how can multiples of 5 to 7 times now be justified.

All this is helping to do is drive prices onwards and upwards.

Not enough houses are being built and the population is increasing so l fear there will be no correction in the market unless there is a substantial increase in interest rates.

[Alexandra Dawes]

Having spent the last 10 years abroad we are staggered by the ridiculous house prices in the UK!! We want to see the Bank rate increase a couple more times- at least savers can get a better deal! Hopefully prices will drop enough to give us a chance to get back on the property ladder. We cannot inderstand the mentality of people who just keep taking out bigger & bigger mortgages!! When we werefirst time buyers it was impossible to get more than 2 1/2 times our combined salaries interest rates were sky high more than 8%.!! All the young want to do these days is spend spend spend and get into debt.

[Alexandra Dawes]

If the Bank of England hikes up another interest rise it will be in my opinion a good move. Perhaps it will help curb all this crazy consumer spending.I don't have any sympathy for people who get themselves into debt. The housing market has been on the upward trend for far too long - a crash is inevitable.Property investment has always had highs & lows but prices have soared to ridiculous levels in the past few years.The Inland Revenue and Estate Agents benefit the most out of all this. Who wants to be house rich but cash poor!!!

[Amanda]

I have just spent over an hour reading through all the above comments on house price predictions, but I'm still petrified about my recent decision. I have just agreed to a sale of my home for £20,000 below the asking price. I'm a single working parent and as a result have rising depts. I have decided to go into rented accomodation, which for a 3 bedroom terraced house in my area averages at £1,300 per month. I am gambling on a crash within the next 12 months so that I can use my fairly substantial equity to purchase somewhere with a more managable mortgage. I just want to be able to have some fun with my children, you know go on holiday and such! I'm so nervous and have never gambled in my life, not to mention ever shown any interest in the economy. I'm learning fast and am slightly cheered by the comments from Steve-Aug 04, please God lets see the return of 1998 :-) Common sense tells me that with gas and electricity, and interest rate rises, this winter will hit many hard. Surely this will mean reduced prices for next spring, won't it?

[mike cassidy]

now we are being offfered inter generational mortgages...to fuel the market even higher.....
a amrket without buy to let landlords would have had a set back long ago
A Correction???
yes but when????
By how much???

[Michael Deman]

Alas, I also sold up when I became an expatriate some 20 years ago, and I have been watching the antics of both borrowers and lenders with stark amazement. I am old enough to have survived many economic cycles, and I read the short-termist optimistic comments made about how people have everything under control.

Personal debt under control? Sure, just make bankruptcy the easy option. Inflation under contrrol? Sure, just cook the books. Interest rates under control? I don't think so. Unemployment under control? I don't think so.

How many people reading this remember having to pay up to 15% interest rates on mortgages? I paid off my mortgage over 15 years at an average rate of 11%. But then I didn't buy-to-let, I bought-to-live, and I didn't borrow more than 3 times my earnings.

It is amazing how many people think that inflation has been curbed for ever, that low interest rates are their permanent right. Remember inflation at over 20%, when Harold Wilson had to go cap in hand to the IMF to be bailed out? Who says those days can never come back again?

Certain friends of mine say that I am missing the plot, that there is a solid supply/demand equation that underpins these stratospheric prices. I don't think so: with even the most liberal of debt regimes, the population as a whole will reach the limits of its capacity. The buy to let people will be the first to bail out once rates increase seriously, it seems to me - followed by second home buyers. And if Polish plumbers are working more cheaply than British plumbers, it seems unlikely to me that new immigrant demand will take up the slack in property prices.

Did I miss anything?

[Anthony Brennan]

Are property prices rising it depends on how they are measured.

If measured in terms of Pounds they are rising. However people assume the measure ie pound sterling is stable. Well it is not. By issuing more money than value created by the economy the pound's value is being undermined. M3 money supply is up by 12% this year, which in effect holders of Pounds or assets in pounds are 12% worse off.

If houses are measured in real money terms ie gold you will see that houses are in fact going down.

The western governments have been printing and pumping money into the economy in unpresidented rates and it cannot go on much longer.

Stock market charts are very similar to 1972 a period which saw initial asset value collapse followed by stagflation.

Generally bull markets are follwed by bear markets of the same length. Hence we are currently in year 6 of an equity bear market which commenced 2000 following a bull market of 26 years hence more bad news to come.

House prices with average values of GBP 160k+ are being funded with average earnings of Circa GBP 20k. ie 8 times average earnings whilst funding is available at three to four times average earnings. This is unsustainable and either wages will double or house prices will come down.

The market is on its last legs being proped up by buy to let money and low interest rates. As the market stagnates and buy to let people try to get out of the market house prices will revert to historic ratios ie 3 times average earnings

[Firozali A.Mulla MBA PhD]

USA is seeing the worst of the property downfall because of many internal factors that should not spil over the world. Doolar will lose but Euro will climb up. The mobility of the workers is the main criteria of the housinf factor

[Tim Rogers]

All these comments mostly miss one thing: houses are for living in and not making profit. If you are savvy enough to buy the right place, at the right time, and improve it in the right way, great. But holding your deposit for years awaiting a long hoped for crash is nonsense. You have to buy according to your means, try to budget for times when interest rates rise and go for it. If that means a one bed not a two bed flat then so be it - it beats the uncertainty of renting, bad landlords, unreturned deposits and moving house every six months. I bought a place in need of a lot of work and my hope is that, having done it, I have added enough value to ride out future potential price falls, because property is definitely overvalued - the historical income/value ratio makes scary reading. I think that's broadly a good plan.

[Neusel]

Some facts. Interest rate rises have not had much of an effect on curbing house prices because most new buyers choose fixed interest payments.

Prices have risen (and will continue to rise) through demand. This demand comes from immigration and increased wealth passed directly and indirectly from family members who already own property.

Buyers are still able to afford the higher prices through vehicles such as interest only mortgages, deferred payments and room renting.

Noone wants a property price crash, least of all the Bank of England.

There has never been a better time to buy. If you think prices can't get any higher, they probably will

[Chris_S]

"Buyers are still able to afford the higher prices through vehicles such as interest only mortgages, deferred payments and room renting."

Ummm! This is why the economists nearly always get predictions wrong when they forecast a housing price crash, they never take into account the unquenchable optimism (read stupidity) of the British house buying public. House price bubbles always run longer than these experts predict, to their amazement and they probably wish they were still in there instead of opting out of the house market.

But beware peoples!! Look over your shoulder at what's happening over the pond where house prices have gone into freefall. Australia are also having their local difficulties. Houses have been used as cash machines for many people who borrow against the rising price of their homes to fund their outrageous spending habits. We are drowning in a sea of debt like never before, it only needs another rate rise to tip it. There's already a credit crunch on as banks defend against the ease at which debtors can walk away from their debts using bankruptcy and IVA's.

This one will run on for a while yet, but when it goes pop, it will reverberate around the globe.

[prash]

I think what a lot of people don't realise is that there are a lot of first time buyers who have bought right to the limit of their finances with no room for manouvre, where as we may think £20-50 is not a lot to them it is everything. I rates keep going up how are they going to cope and how are they going to keep up their mortgages, I see a lot of repossesions happening for first time buyers and buy to let landlords who cant find tenants.

[rejy]

The factors which will keep house prices high.

1)More immigrants wanting to buy a house & especially from cash rich eastern europe...which though would initially be in london will soon spread across the country.

2) Banks ever new ways of lending more & more cash... which is tomorrows profit.

3) Governmental interest..since houses are now in effect, pensions & savings of many voters...any adversity will reflect on the chances of political party.

Keep buying

[Denis]

Neusel | August 31, 2006 at 04:09 PM

I think this is absolutely correct for the London market - the rest of the country may have more problems.

[John, Adelaide, South Australia]

Having immigrated to Adelaide, UK house prices seem very high compared to wages and salaries. A modern new 3 to 4 bedroom house here with ensuite bathroom and a 2 car garage costs about AUD 260,000 which works out to about Pound Sterling 104,000 with more land area than the typical english house. Only in Sydney would residential house prices be close to the average UK house price.

Interest rates need to be raised immediately to start cooling the market. It is better to act now rather than allowing prices to escalate placing mortgage repayments at great risk if there is a downturn in the economy and much greater interst rate rises are applied later. It is better to take a little pain now than risk much more down the track.

[Bill]

The US housing bubble has popped, everyone here should take note. It will definitely be coming here soon enough and, as someone who has held off from being a first time buyer at the currentinflated prices, I can only feel happy about this.

Follow this link:

http://money.uk.msn.com/Investing/Insight/Special_Features/Moneyweek/article.aspx?cp-documentid=856854

[Paul Fissenden]

I expect this comment to be ignored like my last 4 or 5. But here goes. No one is to blame accept the BOE Governors (past and present) who pay lip service to No.11 in the hope that the jobs for the boys continues. If and if the lending criteria were constrained as they should be in the interest of the 'future' people of the UK there would be a slowdown in the housing market. But as the New Labour inept governence approve of spend today - sod tommorrow who else could take on the Brown disaster other than the BOE. Bunch or kiss my arse no good people who were promoted by those that care not. 135% lending is common. Abroad the faces of realtors look on with amazement and disbelief.

[Jon]

Response to Paul F.

As this is supposed to be for discussion and Paul doesn't want to be ignored here goes? I agrre with the thegeneral concern about the BoE. However, who are the BoE? Originally they were a private corporation, then the BoE was nationalised now they are 'independent' and I admit I don't know what that means. These people are not elected, but they control money. The people who control money control everything. Is this why the BoE need to be watched?

[Robert Brakowitch]

The media is generally very poor at giving advice on getting on the house ladder. Instead of suggesting increasingly more unconventional borrowing, parental guarantees and inter- generational mortgages, they should perhaps tell people to be realistic and rent/share/stay at home for a little bit longer. If more people took this advice we would certainly see a down movement in prices. We seem to be in a generation of people who cannot do without even if the prices are vey high. We cannot rely on government or watchdogs to protect us from the lending practices of banks we should be more responsible.

[Dean Bloomfield]

Im simply not prepared to buy a house at these prices. If they stay this high I am off to a country which doesnt use its property prices to hold up the economy. Most messages will tell you to "buy buy buy", but these are from VI's talking up the market because they probably have their hand in the property, and probably why this post wont be printed!

Do a Google on House Price Vrash, and you will get a shock!

[Charles Stanhope]

I think the most annoying thing is all these stupid key worker programs what about the rest of us trying to get on the Property Ladder. (PS a key worker could well be a head teacher on some 80k )
Also all those that purchased their "Tax Payer" subsidized council houses at again tax payer subsidised discounts should have been subject to a windfall tax.

But none of the major parties care about this issue they are more concerned on the amount of plastic bags the supermarkets provide their customers...

[derek bevan]

Doom and Gloom,
Wait until the inland Revenue get their hands on the income from the Buy to Lets,and has the expertise and man/woman power to investigate Mortgage Lending.Catastrophy.

[Jane Cornforth]

I have been monitoring the property prices in a local Bath newspaper and have noticed that many houses are failing to sell at the reqested price. Such poperties are removed from agency web sites and property papers only to be readvertised a few weeks later at a reduced price. It is very rare to see houses advertised with the words 'reduced price', as this would only draw attention to the fact that such poperties were overpriced in the first place. The property crash is already in motion but no one is ready to admit it, least not the estate agents who are driven by greed. Let the crash of the late 80's be a lesson, because as then, it will soon end in tears.

[prefer to not be known as trying to buy at the moment!]

When will the government, estate agents and the rest return property to being homes where people live and not the pure investment and 'too rich kid' fun they have become!

[Nick Singlehurst]

I live in France and France is rapidly getting into the same situation as in England.Low interest rates combined with encouragement to borrow greater and greater amounts has caused countless families to get into potentially disastrous financial situations.And this in a country where until recently low house prices were part of life. An excessive influx of cash rich foreigners has,to say the least,not helped!

From a practical aspect the only weapons to stop house prices rising seem to be much greater interest rates and strictly enforcable restrictions on the amount that an "ordinary working man" can borrow.

Free market forces have failed.

I agree with many of the viewpoints expressed in the comments. Weakness by governments and by the Bank of England.
Greed by financial institutions lending indecently large sums.

It seems that house price increases of say 8 per cent per annum are considered
reasonable.What a laugh!

Roll on a 10/15 per cent house price collapse it is badly needed.
If it does not happen soon the a worryingly greater collapse will happen later.

[paul Dawson]

Thanks for some insightful comments from many sources.House prices reflect the wider economy . At the moment the UK economy is ( according to many commentators ) in a"sweet spot" ie lowish inflation ,lowish unemployment etc..This has made a lot of people want to take on more risk.Buy to let and other similar products have increased the amount of risk that people can take .If ever the economy becomes worse or the opposite, interest rates increase ,some high risk taking investors/gamblers will be forced to sell.History shows that over time assets return to the average.As an expat who recently sold a UK property because it was overvalued ,I am wondering what the trigger will be that causes a drop in UK house prices.Any Ideas?

[Phil Elmes]

Politicians and economists would like UK citizens to believe that they have entered some kind of never-ending, golden triangle in which low inflation, low interest rates and low unemployment can somehow underpin high single digit or even double-digit house price inflation ad infinitum. As wages are not rising at anything like that rate, something has to take up the slack and that is ever more creative lending practices eagerly supported by the real estate industry. It doesn't take an economist to reason that there has to be a breaking point. Here in Australia, except for the resource boom areas of the west and north, we reached that point 18 months ago, since when house prices have been steadily declining, which is about the best scenario that can be hoped for by the Brits. That the UK property boom has lasted longer and continues to cling on for grim death can only presage something worse.

[Nick Singlehurst]

Arguably,there is nothing more important to the future prosperity of the UK than stopping the rise in house prices.The Bank of England and lenders still have not got this message.Interest rates need to go up by at least one half a percent in November and lenders must be compelled to be socially responsible and stop the inadmissably high level of lending to desparate would be house owners. However,the Bank of England is incapable of firm decisive action,and the lenders will do anything to boost their profits. At some point it will all end in tears.

[Thies Gehrmann]

Although the increase in interest rates will decrease the amount of inflation, it will also introduce more unemployment (as a shift in the Aggregate demand curve shows). As people are forced to save, and firms and indiciduals invest less, less will be produced, and that is an idicator of unemmployment.

[gordong156]

UK land values (not the price of bricks and mortar) are the biggest obstacle to people getting on the housing ladder. This is something that only a major change in government policy will change...

http://www.ablemesh.co.uk/thoughtsboombust.html

[Rob Jones]

I am self employed, I left my job to start my own business with hope that i will make more money too afford a house! I left a 20k job, even on that money i couldnt afford a house for my family. We now live with her parents, the council wont give us a house nor will the local housing agency. The knock on effect of interest rates has caused my business sales to decline. My daily hopes are for a crash in the market. Will it happen???

[Bibimus]

So let's talk of inflation. House prices 100 percent inflated over the last 5 years. When the government tries to control inflated house prices we see increases in taxation. A method used to control the economy. They can only do this so much though......otherwise the ever growing middle class will rebel.
As a final part of the cycle elevated High Street inflation (Food inflation is reported to be 5% by some sources) and eventually Job losses etc. Escalation in crime. Skilled workers leaving the country. The Education System and Social Services decline in standards. Blairs Britain. It is Government Policy to blame....but why should the Government control bank lending when it controls taxation? Let the party begin...or have I already missed the start of it? We have never had it so good Mr Brown. Thank you.

[attract wealth]

That was a really good post. It helped me to make sense of some of the issues with the subject. There is another good blog on the same topic that I was reading a while ago.