As the latest housing data is released showing a 64% decline in the number of mortgages completed last month, as compared to this time last year, It seems something significant is happening in the housing market and wider economy. This news combines with the inflation rate of 3.3% and the £550 million write off by Taylor Wimpey from UK losses to reveal a housing market with problems today and far worse to come.
As inflation increases the Bank of England will look again to raise interest rates above the 5% they are currently. As this happens the lenders will increase the deals they have on offer to higher levels and this is when everyone will notice that a high rate deal on a house of average price £179 ,000 – £184,00 will, in conjunction with an average 10% deposit + fees + stamp duty, result in an impossibly high start up cost combined with a huge monthly payment.
The problems of Taylor Wimpey show how the business side of this market is already suffering and now even the biggest of players is having to look for a buyout or share capital. As new business drys up and the prices of houses start to fall, all the land that Taylor Wimpey have bought for new housing projects not only stands empty, but starts to look over priced and gets re-evaluated, netting Taylor Wimpey a huge loss. Taylor Wimpey are not the only ones who are going to get caught ‘holding the baby’ with huge inventories of land; eventually the rapid decline in the price of property will result in a less well-financed business getting caught out. The shared problem now being market capitalisation dropping by 75%, meaning they can’t raise funds for new projects or lending to offset their losses.
The cyle of problems now has a lot of key pieces, as construction companies lay workers off and estate agents go too, the jobs situation will put families with mortgages in financial peril as repossessions have previously ensued in this situation. The fundamentals that I keep hearing are all fine at the moment, are not fine at all, its just the lag on the effect that is still feeding through the system. The fundamentals being the rate of employment, the rate of inflation and the rate of interest.
The real problems however will begin when the inflationary spiral tries its best to start. The fundamentals followers’ claim that there’s no inflationary spiral at the moment, so when the current fuel increases have fed through the system, the rate of inflation will fall back and everything will go back to normal, interest rates can be lowered and the housing market can recover in the nick of time.
The Governer of the Bank of England, to his credit, has not chased the housing crash like The Federal Reserve in the US have, and the current Interest Rate of 5% will make his best scenario a possibility, and a rate cutting intervention in those circumstances would make him a total superstar of economics (and rightly so). I think however, what has been overlooked is the current increase in gas and oil prices increasing the price of food and transport with them, and this will lead to inflation that may have its limit, but is enough to trigger wage-led inflation that will add to the food price increases at the point of sale and IS going to be the trigger of an inflationary spiral. That may mean that Interest rates have to go above 6% and take longer to come back down, which would then lead to a recession. It will be a close thing in the UK but some good work by The Governor of the Bank of England (in spite of some of the short-sighted retail advisers on the Monetary Policy Committee) has at least given the UK a fighting chance.
The US however have not got with the program, and having lurched after the housing crash now have Interest Rates of 2%, which are too low to fend off the inflation that has built up from high energy costs. They are starting from too low down to manage this problem properly and will end up chasing interest rates all the way back up over 4% (and probably higher), and whatever ground they may think they’ve gained from lowering them suddently in 2008 will be lost as those just hanging on finally go under and start the next phase of housing crash in the USA.
For the same reason as in the UK, they will experience fuel led inflation leading to wage led inflation, leading to higher prices at the shops and starting the inflationary spiral. The best thing the Federal Reserve could do at the moment is cut their losses and start the inflation fight right now, but instead of making the hard call like the UK and EU made to stay on top of inflation and, in effect, be proactive in the right area at the right time, the Federal Reserve are now holding Interest Rates and watching to see what happens before they will make the hard call to lift Interest Rates. By the time they have data on the start of an inflationary spiral it will already be too late to get on top of it quickly. This then means that instead of taking on a recession, the Fed are waiting to buildup a bad recession, and will take this on instead. I feel they either lack the courage to make a move or have some Presidential legacy to protect instead, consequences be damed.
Posted by ullrakesh 