Interest Rates Lower- a personal view - 2nd August 2001

"Old Lady Wakes Up"
Amazingly, the Bank of England has taken the brave decision to concentrate on the effects that high interest rates are having upon the manufacturing economy, whilst relaxing, slightly, their attitude towards rising house prices in London and the South-East. This is, I believe, the correct view because household incomes are the ultimate limiter of house prices - tinkering with interest rates can only have temporary effect. The housing market should be allowed to achieve a natural balance between the numbers of people who are ready, willing and able to buy, against the numbers of houses there are available for sale. This said, there is a danger that lenders and borrowers might utilise the extra "buying power" that the lower rate brings, to lend/borrow at even greater income multiples. This, to my mind, would be foolhardy.

Now it is the turn of mortgage lenders to behave responsibly by controlling the amount of cash that is allowed to flood into the housing market. Get this right and the property market could become a pleasant place to be these next several years. Get it wrong and Nightmare on Threadneedle Street won't just be a good title for a horror film.

Prudent lenders will keep tight control over lending levels. Income multiples should not be allowed to drift upwards, borrowers should also be wary not to exceed levels they can comfortably handle if, say, rates were suddenly to increase again by 2% or more. If lenders and borrowers control their urge to take advantage of lower rates, property prices will top out sooner and should then follow a much gentler curve - they will track wage increases and inflation. If lenders and borrowers fail to control themselves, then the real danger is that the property market will over-heat and, when rates again increase, there will be a great deal of blood on the streets.

My tip for any buyer given the above scenario is to buy within your current means. Unless you KNOW your salary is going to increase in the next 12 months, do not be seduced into borrowing at greater than traditional income multiples - unless you like to live dangerously!

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