Urquhart Stewart fears a potential interest rate timebomb as property prices forge ahead

13th May 2013

Demand for property in London has grown three times faster than supply over the first three months of the year indicating London is nearing levels last seen pre-financial crisis writes Philip Scott.

According to property website Hometrack, in the capital, where demand is far outstripping supply, the average time on the market for a property is almost half the national rate at 4.6 weeks, a level last seen in October 2007.

In addition, the group’s says in the capital the proportion of the asking price achieved now stands at over 95%, again at a level not seen since summer six years ago.

But Justin Urquhart Stewart, marketing director of Seven Investment Management warns that the UK property market could be facing very bad news in the medium to long term. He points to Bank of Ireland’s actions at the start of May where overnight the lender doubled its tracker rate, walloping some 13,500 UK borrowers with substantially increased repayments.

He said: “A hand grenade has gone off but we are waiting for the bomb. In terms of Bank of Ireland’s move a borrower with a £100,000 mortgage could need to drum up an extra £160 a month. What happens when in two to three years when the UK government ups interest rates and thousands face higher repayments.

Urquhart Stewart says the government needs to address the issue of the dire need of more affordable housing. He adds: “The UK has really only been a nation of homeowners for the past 40 years, renting was very common prior to then. The government needs to look at potential solutions such as assured tenancy, where contracts between landlords and tenants are long term, offering people more security.

“We are in a position where small terraced houses in central London are selling for £1m. We haven’t seen a real-property crash in the UK as of yet. And when interest rates start to rise, they may do quite quickly. This could cause very significant financial difficulty for homeowners.”

In regards to the broad picture, according to the latest data from Halifax, part of Lloyds Banking Group, UK house prices increased by 1.1% last month compared to March, making properties some 2% up on 12 months previous. The latest figures give the average home a market value of just over £166,000.

However, the high prices and lack of mortgage availability have led to predictions that the UK may once again become a nation of renters. It is clear that insurance companies are increasingly interested in the sector. The latest talk was of an investment by Aviva reported on Reuters reported that Aviva is in negotiations to enter the rental market.

19 thoughts on “Urquhart Stewart fears a potential interest rate timebomb as property prices forge ahead”

  1. Pavlaki says:

    I do have to wonder about statistics for an entire economy being measured to one tenth of one percent as in retail sales of food dropped 0.2%! And now we are going to add drugs and prostitution which no one really knows what the real figures are!! So on one hand we are taking at face value extremely tiny movements in data and commenting on it and yet they are about to throw a guesstimate into the mix – which will no doubt be measured to one tenth of one percent as well!! It’s crackers! The temptation for governments to boost the estimates for drugs and prostitution when GDP sags a bit must be significant. After all – who can argue with the stats if they are made up anyhow.? I think I’ll join Forbin on the sofa with some popcorn. This really is getting to be quite a show!

    1. Anonymous says:

      Hi Pavlaki

      You are entirely right to question how we can analyse changes of 0.1% as significant when the numbers are nowhere near that accurate. I recall a couple of years ago when I looked at the 3 different ways of calculating GDP in my subject of yesterday, Portugal, and the difference was 4% between the smallest and the largest. I cannot give you numbers for the UK because some years ago the then Chancellor Nigel Lawson gave instructions for only one to be publicly available. Presumably on the logic of don’t frighten the horses…

  2. shrimpers says:

    I meant to add, tax returns/Govmt income streams vs expenditure rather than this GDP nonsense comparison

  3. forbin says:

    oh come , Shaun, you’ll never land that big job with Mini Tru

    repeat after me , four legs good , two legs better !!

    now with a straight and somber face announce..

    ” today the chocolate allowance has been increased from 4 ounces to 2 …”

    Forbin,

    Ps: does the new measures mean that on balance toffee popcorn is now cheaper than regular ?

    1. Anonymous says:

      Hi Forbin

      Thank you for reminding me. As I did my shopping at the weekend I spotted that a bag of own brand (Tesco) toffee popcorn had fallen in price from £1.10 to £1. Maybe the fall in corn futures (US $4.45 now) is having a effect! Although of course I do remember reading that for a box of shredded wheat the box costs more than the wheat, Qi I think was the source.

  4. forbin says:

    Hello Shaun,

    Ofcousre we’re better off , aren’t we?

    today we have a news item to warm the hearts of economists and enviromentalists every where

    http://www.bbc.co.uk/news/business-27779815

    This will ” trickle down” to those pensioners and other poor people who’s Smart meters will help them save money in the middle of a cold harsh winter when the turbines aren’t spinning………

    They will be “better off” won’t they ?

    The Houses of Parilment will be kept warm though , need to be comfy to run the country , won’t they ?

    Forbin

    “The Lunatics (Have Taken Over the Asylum)” Fun boy Three

  5. Ian says:

    I’ve always thought the GDP figures understated the UK’s performance compared to Europe. When travelling to Paris or Milan everything looks 80’s and decrepit. I also think the trade figures arent right, there is no way you can run a deficit that large for that long. The ONS is simply missing huge volumes of trade!

    1. Pavlaki says:

      Maybe we have more hookers and dope? The GDP revision will show the correct comparison?!

    2. Anonymous says:

      Hi Ian

      That is an interesting line of thought. How would you go about itemising and putting a number to the thought that the UK GDP performance has been understated?

      One factor in favour of your logic is the way that London has often been favourably compared to Paris recently including by some who have joined the exodus from the latter to the former. We were always previously told that out infrastructure was poor and our streets dirty etc..

  6. therrawbuzzin says:

    Scotland’s GDP gets less of a boost because its figure is less affected by jiggery-pokery.
    I factually feel 0.1% worse off because I eat.

    1. Anonymous says:

      Hi therrawbuzzin

      In what way is this so? After all the same methodology is applied..

      1. therrawbuzzin says:

        Scotland’s economy differs slightly from the UK’s as a whole; it is higher in goods, etc. and lower in intangibles. Goods which can be quantified
        Assumptives will thus form a smaller part of Scotland’s GDP.

        As Scotland accounts for something like only 9.8% of GDP, it escapes the focus for boost and some of the jiggery-pokery.

  7. Jim M. says:

    “extensive data gaps have been filled with assumptions”

    Literally and figuratively priceless!

    1. Anonymous says:

      Hi Jim M

      I was always told to never assume (” as it makes an ASS out of yoU and ME”) but statistical school apparently missed that class.

      1. Jim M. says:

        Hi Shaun,

        And we wonder why there is a gulf between outcomes and expectations? Allow me that kind of latitude and I’ll prove up is down and Elvis is my neighbour.

        What strange rules you economists play by. I sometimes wonder if you’re not all making it up as we jolly along? 😉

  8. Anonymous says:

    Hi Shaun,

    there is a simple solution, to calculate GDP on actual expenditure, and also quantify actual items purchased by weight or volume.

    For illegal/unrecorded activities like prostitution or drugs, use tax evasion rules and asset recovery to target the mafia bosses.

    I don’t know if British politicians / bureaucrats are incapable or just unwilling but the result is a failing state either way.

  9. Anonymous says:

    Great analysis, Shaun. The introduction in September of new GDP estimates based on ESA-10 by ONS will coincide with the publication of quarterly consumer price series for owner-occupied housing based on the net acquisitions approach for the UK and for all other countries in the EEA. A May 2014 ONS paper, “Impact of ESA95 Changes on Current Price GDP Estimates”:

    http://www.ons.gov.uk/ons/dcp171766_365274.pdf

    indicates that this would add £4 billion or 0.3% to UK GDP in 2009, and from less than £1 billion to £4 billion in any given year between 1997 and 2009. While this change does not command the “sex and drugs and rock and roll” interest of adding illegal activities to UK GDP, it will nonetheless have an important impact. For comparison, in 2009, illegal activities would add £10 billion to GDP, and from 1997 to 2009 would vary between £7 billion and £11 billion.

    I suspect almost all of this own-account construction activity would represent residential construction. The ONS pilot index for net acquisitions estimated from 1988 to 2011 for the CPAC was based on national accounts estimates. It did include estimates for self builds, and the technical paper states: “Between 1996 and 2011 the weight of self build properties within OOH(NA) ranged from 2.6 to 4 per cent.” One wonders if the new pilot index calculated for Eurostat incorporates these revisions to the National Accounts estimates and if they shouldn’t show higher numbers. As I understand it, in terms of pricing, self-builds would be measured using the renovations price index, not the housing price index.

    I was actually surprised how important self-built homes seem to be to the British economy. It seems they are substantially more important than they are to the Canadian economy. Andrew Baldwin

    1. Anonymous says:

      Hi Andrew

      I too was somewhat surprised by the size of the self-build sector in the UK economy. I know personal experience has it flaws but I only know of one couple who have actually gone ahead with such plans. But it does seem to be in the news so I will look out for it.

      http://www.selfbuildportal.org.uk/latest-news/12-news-archive/275-uk-s-first-self-build-community-gets-the-go-ahead

      I would have thought there would have been more self-builds in Canada so i guess it must vary a lot.

  10. Anonymous says:

    Hi Shrimpers

    Thank you.In many ways GDP has been overused and over-employed. What I mean by that is that it was never intended to be put to the purposes and to be under the pressure it is put. Adding to the pressure with the changes above is simply window-dressing, with the exceptions I highlighted.

    You do not have to be a worldly cynic to wonder if the fact that we have experienced a recession/depression is the driver for us being told we were better off all along…

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