The End of Low Interest Rates?
I haven't made any comments about the property market for some time. In
fact, contrary to common sense and economic signs, UK property prices
have apparently been rising. I have indicated that this is not the
beginning of a new boom. Those who have been following my analyses of
property prices over the years will recall that I rather cheated last
december by setting out, not one scenario for house prices, but no less
than three. It's the first time I have done such a thing, and clearly I
was right to do so.
The economic conditions lead us to stagnant property prices. However, I
thought it prudent to add an argument for what would happen if the
politicians got involved in the property markets, which I thought
likely. Well, that's exactly what happened earlier this year with the
UK government's scheme for helping first time buyers.
I was not alone in slamming the proposal. And that brings us neatly to
what I want to talk about now.
The reason I and the more sensible of my colleagues argued against the
political scheme was that it was likely to lure people who could not
afford to shackle themselves to a mortgage into the market. Remember,
the situation is (still) that interest rates are at an all-time low.
They cant stay there. That means anyone lured into the market while
rates are low can only look forward to rises in the future, and
therefore more strain on the purse. In short, the political tinkering
with the system to produce a short-term feel of prosperity is likely to
set things up for a future crash.
I, like virtually everyone else, has no idea when the system will
change, but change it will. We cant have low interest rates for ever.
They must rise and they will rise. But up until the last week or so
there has been a feeling that the current low rate era will last for
another couple of years at least.
So, what's happened to change the stakes?
The current tangle of arguments surrounding Obamacare, and the budget
deficit, and the debt ceiling have all collided into highlighting the
hopelessly insecure nature of the American economy, and its ability (or
rather lack of it) to support government programs. This has led many
economic observers to warn that the US bond market is dangerously
overbought.
With economic disaster seemingly on all fronts, and with interest rates
on the floor, the safe haven for hot money has seemed to be US
government bonds. With such consistent demand for the bonds, the
government has been able to keep the interest rates low. However, that
has started to change, and with a vengeance.
Last week two of the largest bond purchasers unceremoniously exited the
market, Fideity and J P Morgan. Will this cause a stampede?
Alternatiely, will it cause a slow but steady exit from these financial
instruments? Whichever is the case, it will inevitably mean an increase
in interest rates to attract money in the future.
Of course, it may be merely a blip in market sentiment. There is so
much political interference in the markets these days that it is hard
to say which force will triumph. But what happened last week is a
warning that low interest rates are at risk, and that spells extreme
caution for the property markets. Any rise in mortgage rates will kill
off whatever rise there is in the UK market, and it will drive another
nail into the already fragile European markets.
I know I sound a bit of a bore, but now is not the time to be looking
at venturing into the property market for the first time, and it
certainly is not the time to expand your portfolio. If it is the case
that we are now entering the end of the low interest rate era then
house prices are not about to recover anywhere.
For the future, you need to keep an eye on what happens to US Treasury
Bonds. If there is a sustained flight from these bonds, then life is
going to get more expensive for all of us.
john