UK house-price growth is slowing as interest rates rise...
HOUSE PRICE growth is starting to slow reckons Nationwide, says John Stepek at MoneyWeek magazine.
In April, annual growth fell from 14.3% to 12.1%.
So cash-strapped first-time buyers will not be rejoicing any time soon.
But is this a sign of things to come?
Rising interest rates are bad news for asset prices generally. That's been very obvious from what's gone on in wider markets this year.
Yes, there's been plenty of scary bad news, but the main reason that bond markets and equity markets have had such a tough year so far in 2022 is not because Russia invaded Ukraine. It's not even because the price of energy has rocketed.
It's because central banks are raising interest rates.
If interest rates are rising, you need to get higher returns on your investments to keep up. One obvious way to get a higher return on your investment is to pay less for them in the first place.
On this front, house prices will be no exception.
But there's a but.
All else being equal, rising interest rates imply lower house prices. However, this is likely to involve more of a lag for houses than it does for other assets.
There are a few reasons for that. Firstly, we all need somewhere to live. If you don't want to own a house, you'll have to rent one.
Put purely in investment terms, that makes residential property an unusual asset class. If you don't want to own shares or bonds, you can hold cash; you can take what is effectively a neutral stance.
Yes, you might end up buying into the market at a later point at higher prices than you could have if you had just held on, but the simple act of not owning shares is not going to cost you anything in nominal terms.
With residential property, by contrast, you're either long property (you own it), or you're short property (you have to pay for the privilege of not owning it).
So while there might be lots of people out there looking at their equity portfolios and wondering whether they should favour holding a bit more cash than usual for the time being, that just doesn't happen with the residential property market.
The vast majority of people won't sell their house to move into rented accommodation purely on the hunch that house prices are set to go down (which is absolutely sensible). So selling does not beget selling in the same way as a stockmarket panic, for example.
People generally only sell if they're forced to. And that generally only happens in times of rising unemployment and surging interest rates (the early 1990s is the most recent example in the UK – the 2008 crash was somewhat different).
Secondly, central bank rates aren't the thing that matters directly. What matters is the availability of mortgage credit.
People talk about physical supply and demand for houses. This matters for lots of reasons. But if prices are what you care about, physical supply and demand pales in comparison to the supply of credit.
We've explained why mortgage availability drives property prices several times before with reference to yields, but here's an even simpler way to put it: the average individual's "demand" for property can be represented by "I demand the best house I can get for the money available to me".
In other words, your demand for property at any given time is equal to the maximum mortgage you can get.
In turn, that means house prices are almost purely a function of mortgage supply. And while the Bank of England rate certainly influences the supply of mortgage credit, it's not the only thing that matters.
What really matters is bond yields – which is basically the price of money as set by the wider market. This is the main reason, for example, that right now you can fix your ten-year loan for around the same price as a two-year loan.
Put simply, markets expect interest rates to go up in the near term – which means the two-year cost of money has gone up. But they then expect them to come down in the longer run, because they're worried about an economic slowdown further into the future. As a result, the ten-year cost of money is about the same as the two-year, whereas normally it'd be significantly higher.
What that all means is that rising central bank rates don't necessarily equate to an instantly tighter mortgage market and falling house prices.
A good example is the lull in 2004 and 2005. Back then, it looked as though rates were climbing and, as a result, house-price growth began to slow. It looked as though we'd reached a peak.
Then, however, central banks got rattled and became just a tiny bit less aggressive on rate rises (the Bank of England pushed through a controversial quarter-point cut in August 2005, one which then-governor Mervyn King voted against). We were off to the races again and then it wasn't until everything went pear-shaped during the credit crunch in 2007 that the actual crash came.
What should you do about the uncertain UK housing market?
If you're looking to buy a home to live in, timing the market is not the thing you should be worrying about; no one has a crystal ball.
All you really need to care about is ensuring that you could afford your mortgage if interest rates rose (ie you should probably fix if you're going to buy), and also that you're going to be happy in your new home (my main house-buying tip is this: always talk to your prospective neighbours before you move anywhere, because in my experience, people are wonderfully honest about the pros and cons of an area).
If you own a house, it's probably worth reviewing your mortgage situation. If you haven't fixed, it certainly seems worth considering. If you're close to the end of a fix, start shopping around now – you can usually lock in a new rate six months before your old one ends.
And if you're looking to invest in property – well, it's a specialised area and if you've come here looking for ideas on how to do it, that implies to me that you don't know enough to be thinking about doing it at this stage in the cycle.
That said, if you're bullish on residential property and you want to look at a more straightforward way to get exposure than by getting into the landlord business, you should read my colleague Rupert's piece on the housebuilding sector.
And for more on why economist Fred Harrison – who got the 2008 crash right – believes that house prices won't crash until 2026, listen to his podcast with Merryn or read the transcript on the MoneyWeek website.