Bank warns of potential global housing slump
Wednesday, 25 July 2007
ABN Amro has warned that the ever-rising costs of borrowing could spark a global scale housing slump. The investment bank says that families have burdened themselves with unsustainably large mortgages which could leave them vulnerable to spiking increases in bond yields and further increases in interest rates.
Although Britain is particularly exposed owing to its speculative buying in the past decade, it is not the only country that might have problems.
A leading economist at ABN Amro
Yields on government bonds are a key indicator of the cost of borrowing and they have increase in the last week or so. Financial markets have felt a cold shiver at this news. There have been widely reported fears in recent weeks for the US housing market, but the level of over-valuation is more severe in the UK, Australia, Spain and Ireland. In April the bank calculated that UK residential property was up to 50% overvalued, compared with the USat just 25% overvalued.
The next few days will provide a number of figures giving critical information about the health of the British economy. Perhaps the most significant will be the monthly inflation figure. The Consumer Price Index (CPI) was down to 2.5% in May, from 2.8% in April. Any easing of that figure would be of great help, but it is unlikely to fall enough to prevent another increase in interest rates in the UK – probably in the autumn. The Bank of England's Monetary Policy Committee is aiming to get the CPI down to the Government's target of 2%, but other indicators (such as the reported level of high street spending) are suggesting that the five interest rate rises in the past twelve months have still not been sufficient.
The UK housing market looks to unsustainable as it has been reported that borrowers are taking record-level loans on average 3.7 times their income, and mortgage interest payments now account for 19.1% of income.
However, house price inflation has been reported to have more than halved in June as interest rates started to bite on mortgage repayments. The report, from the Royal Institution of Chartered Surveyors (RICS) says that enquiries from new buyers fell at their fastest rate since February 2006. This seems to be a clear indication that the property market has started to cool at last.
The report is closely monitored by the property industry and economic experts. It said that only 10.6% more of its members reported a rise in property values, rather than a fall in June. That figure was 22.5% in May.
House prices did continue to go up in June, but the rate of increase was slower than the long term average. Despite the slowdown this was the twentieth month in a row that values have increased.
The report indicated that the interest rate increases have started to have an effect on people looking to buy homes, especially first-time buyers. Most UK regions saw an easing in demand, although Wales, West Midlands and Scotland were exceptions.
In May there was a glut of houses coming to market, but that ended in June. The reason for the increase in May was people hoping to avoid the necessity for Home Information Packs and their associated costs, but with their delay until 1 August, and the fact that they will only be needed on properties with four or more bedrooms, the urgency has eased.
There were just over 25% of RICS members who reported an increase in new instructions in June. This was down from 41% in May. The ratio of completed sales to available property stock went down for the third month in a row.
Surveyors' confidence in house prices has been hit by the increase in interest rates, and optimism has fallen to its lowest level for three years.
Spokesman for RICS, Ian Perry, said: 'House prices have finally started to cool significantly for the first time since the recent mini boom in the housing market got under way in 2006.
...........................................
www.thriftyscot.co.uk
Although Britain is particularly exposed owing to its speculative buying in the past decade, it is not the only country that might have problems.
A leading economist at ABN Amro
Yields on government bonds are a key indicator of the cost of borrowing and they have increase in the last week or so. Financial markets have felt a cold shiver at this news. There have been widely reported fears in recent weeks for the US housing market, but the level of over-valuation is more severe in the UK, Australia, Spain and Ireland. In April the bank calculated that UK residential property was up to 50% overvalued, compared with the USat just 25% overvalued.
The next few days will provide a number of figures giving critical information about the health of the British economy. Perhaps the most significant will be the monthly inflation figure. The Consumer Price Index (CPI) was down to 2.5% in May, from 2.8% in April. Any easing of that figure would be of great help, but it is unlikely to fall enough to prevent another increase in interest rates in the UK – probably in the autumn. The Bank of England's Monetary Policy Committee is aiming to get the CPI down to the Government's target of 2%, but other indicators (such as the reported level of high street spending) are suggesting that the five interest rate rises in the past twelve months have still not been sufficient.
The UK housing market looks to unsustainable as it has been reported that borrowers are taking record-level loans on average 3.7 times their income, and mortgage interest payments now account for 19.1% of income.
However, house price inflation has been reported to have more than halved in June as interest rates started to bite on mortgage repayments. The report, from the Royal Institution of Chartered Surveyors (RICS) says that enquiries from new buyers fell at their fastest rate since February 2006. This seems to be a clear indication that the property market has started to cool at last.
The report is closely monitored by the property industry and economic experts. It said that only 10.6% more of its members reported a rise in property values, rather than a fall in June. That figure was 22.5% in May.
House prices did continue to go up in June, but the rate of increase was slower than the long term average. Despite the slowdown this was the twentieth month in a row that values have increased.
The report indicated that the interest rate increases have started to have an effect on people looking to buy homes, especially first-time buyers. Most UK regions saw an easing in demand, although Wales, West Midlands and Scotland were exceptions.
In May there was a glut of houses coming to market, but that ended in June. The reason for the increase in May was people hoping to avoid the necessity for Home Information Packs and their associated costs, but with their delay until 1 August, and the fact that they will only be needed on properties with four or more bedrooms, the urgency has eased.
There were just over 25% of RICS members who reported an increase in new instructions in June. This was down from 41% in May. The ratio of completed sales to available property stock went down for the third month in a row.
Surveyors' confidence in house prices has been hit by the increase in interest rates, and optimism has fallen to its lowest level for three years.
Spokesman for RICS, Ian Perry, said: 'House prices have finally started to cool significantly for the first time since the recent mini boom in the housing market got under way in 2006.
...........................................
www.thriftyscot.co.uk