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Background infoHouse prices- The UK housing market is heading for a slowdown rather than a crash, it was predicted today.- According to the latest UK Economic Outlook from accountancy firm PricewaterhouseCoopers (PwC), there is a one in five risk of house prices being lower in cash terms in 2010 than today. - However, the chance of a fall in real terms - when inflation is taken into account - rises to one in three, the report said. The firm's model of the housing market, which includes data on supply of properties, household income and interest rates, suggested that in mid-2007 house prices were overvalued by 10%. When supply constraints were taken out of the equation, prices appeared to be 20% too high.- But PwC said the most likely scenario was that house prices would continue to rise at a rate slightly above inflation until 2010, although there would not be the double-digit growth seen in recent years.- Looking further ahead, the report predicts that even if the government meets its target of building 3m homes by 2020, between now and then prices will rise significantly faster than inflation. - "There is clearly some risk of house prices falling over the next three years, but these risks are mitigated by continuing housing supply constraints," said John Hawksworth, head of macroeconomics at PwC.- "The most likely scenario is for a slowdown in the housing market rather than an outright fall in prices, but the latter nonetheless represents a material downside risk for the economy more generally, given the likely knock-on effects of lower house prices on consumer confidence and spending." - Last month, the International Monetary Fund warned that the UK could be headed for a US-style housing crash, with global financial turmoil hitting a market over-valued by more than a third.- It predicted a slowdown in GDP growth from around 3% this year to 2% in 2008, and said interest rate rises and debt levels meant growth in consumer spending looked set to slow by the same amount. - Inflation as measured by the consumer price index should remain around its target level of 2%, it said, while interest rates may fall.- Fixed rates usually appeal to people who want to know exactly how much their mortgage payments are going to be each month. If you opt for a variable rate deal, your payments can fluctuate according to whether interest rates are moving up or down. However, with some economists predicting interest rate cuts in the coming months, tracker deals – which, as their name suggests, follow movements in the Bank of England base rate - look increasingly appealing.- Thinking on the future of interest rates has changed over recent weeks from expecting a rate rise before the credit crunch to now expecting a rate reduction," says John Postlethwaite of Punter Southall, the independent financial adviser (IFA). "There are many indicators that would signify that a rate reduction is in the offing. Rates in the US have dropped by 1 percentage point in recent weeks, inflation has been well below the target for two months and there has been a slowdown in mortgage lending and the housing market. Although fixed rates have softened recently, now may be the time to take advantage of trackers in anticipation of rates in general reducing," he adds.- Melanie Bien of Savills Private Finance, the mortgage broker, agrees that trackers are currently a good option and offer more advantages than discounted rates. "Trackers are a good choice compared with discounted variable rates as the lender has to pass on any reduction in base rate in full, so you know exactly where you stand. A discounted rate is linked to the lender's standard variable rate, which is set at the lender's discretion and does not have to reflect movements in base rate," she says. "Trackers currently represent excellent value compared with fixes, even though lenders have raised rates in recent weeks. There is a widespread expectation that interest rates will start to fall early next year, which will enable those on variable-rate deals to reduce monthly payments further still."Equity prices- Sterling steadied versus the euro and dollar on Thursday, following strong starts by European equity markets.- Buoyant bourses helped the high-yielding pound, which had been hit the previous day by news of steeper than forecast losses at U.S. banking heavyweight Merrill Lynch - Sterling has proved sensitive to news from the financial sector due to its key role in the UK economy and its impact on general risk appetite and investors' willingness to place relatively risky carry trade bets on high-yielding currencies. "It's about ... equity prices and the corporate sector generally (and) in the absence of any bad news (today), equities have done OK," said Paul Robinson, currency strategist at Barclays Capital. "Sterling is generally positively correlated with equities."- The Bank of England said on Thursday that trouble in the financial markets was not over yet and stocks, commercial property and credit markets in the rich world could suffer a further hit .Two million American families could lose their homes before the sub-prime mortgage crisis subsides. As the Federal Reserve prepares a second emergency interest rate cut, there are fears that as the damage spreads, the UK, with perilously indebted households and large financial services sector, will be first in the firing line. The Bank of England last week added to warnings that some parts of the UK economy will be in jeopardy. Fortunately, Ben Bernanke, the Fed chairman, cut his academic teeth analysing how changing credit conditions ripple out through the economy, research he will now be forced to put to use. 'The risk is that we have substantially further to go,' says Russell Jones, analyst at RBC Capital Markets. He calculates that up to $30bn-worth of cut-price adjustable-rate mortgages, many of them to sub-prime borrowers, are due to be reset in the US, often on to much higher rates, every month for the next year. That could mean a sudden jump in monthly repayments of about $500, a significant hit for households whose finances are likely to be tight already. The joint economic committee of Congress warned last week that up to two million homes could go into foreclosure before the crisis is over, costing the economy more than $2 trillion. Charles Dumas, of Lombard Street Research, says that with hundreds of thousands of homes on real estate agents' books, this is only the beginning. 'Repossessions have scarcely started to hit the market and blight the neighbourhoods,' he adds. 'Prices in September dropped 5 per cent. Consumer confidence now has to stand up to crumbling house values as well as excessive household debt.' Jones believes the government may have to step in, perhaps offering to buy up some toxic mortgage assets that have pushed Wall Street's banks into the red. Charles Schumer, chair of the Congress economic committee, urged the White House to 'act quickly to save financially-strapped families from drowning in this flood of sub-prime foreclosures'. Whatever the Fed or the taxpayer do, however, the credit crunch is expected to depress GDP growth. 'It depends on the fundamentals, and the fundamentals, I think, are poor,' said Gerard Lyons, chief economist at Standard Chartered. 'The household sector already faces difficulties, and the sub-prime crisis compounds the problems. It means weak US growth next year, maybe an outright recession.' Analysts remain relatively sanguine about the global economy, pointing to an encouraging 'decoupling', with growth in Asia and Europe less tied to the fortunes of the voracious US consumer than in the past. But even if this optimistic picture is true, there are special reasons to be concerned about the UK - several of which were spelled out by the Bank of England in its twice-yearly financial stability review (FSR) last week. Six months ago, the Bank, prescient but unheeded, used the FSR to warn that many banks had become increasingly dependent on funding from wholesale markets and would suffer if liquidity dried up. Now, as the sub-prime vortex in the US continues to suck in victims from Main Street to Wall Street, the Bank is fretting about the impact of tighter borrowing standards on what it called, 'a tail of vulnerable UK households'. London interbank lending rates have fallen in recent days, suggesting banks may be getting to grips with the shaky sub-prime assets on their books. But even when the immediate squeeze is over, lenders are expected to tighten standards, hitting some borrowers especially hard. The Bank singled out homeowners with poor credit records as well as recent first-time buyers, who are not sitting on a cushion of windfall gains, and buy-to-let investors, who have seen their returns dwindle to almost nothing. 'Although the overall UK household position is robust, a number of groups might be more vulnerable to a tightening in credit availability,' the Bank warned. It also predicted that equity prices could be hit as corporate borrowing gets dearer, and the commercial property sector could suffer. In simple price terms, the UK's housing boom has actually been much bigger than America's. There are familiar special factors at play on this side of the Atlantic that may have given prices an extra boost - tight planning rules, rapid migration, etc. In the US, interest rates rose 17 times from their trough of 1 per cent. In the UK, they never went lower than 3.5 per cent, and the monetary policy committee's latest round of rate-tightening has only involved five increases. Nevertheless, there are reasons to be nervous about the prospects for housing. For example, debt repayments as a percentage of income are approaching levels last seen as the late 1980s bubble burst. Graham Turner, of GFC Economics, reckons 'we're about 18 months behind the US: their housing market started turning down in 2005'. A second cause for concern about the UK's sensitivity to America's woes is that this is a problem made in the markets, so the very strength of London's financial sector could be the Achilles heel. 'I think the UK is very vulnerable,' says Jones. He says financial services have been crucial in generating GDP growth and is clearly at risk, with US and European banks announcing multi-billion-dollar losses and thousands of job cuts. 'It already looks like the financial sector's going to be cut back. M&A activity has slowed, and that's a pretty good leading indicator for the performance of the City, and for London as a whole.' Alistair Darling has acknowledged that the sub-prime problems are likely to reduce GDP growth in the UK. For optimists, such as Peter Spencer of the Ernst and Young Item Club, the credit crunch is a surgical strike on the very parts of the economy - the City and the spendthrift household sector - the MPC was struggling to control with rising interest rates. He believes the strength of the UK's corporate sector will see us through. But others warn that a shake-out aimed directly at the financial sector - and, crucially, at borrowers - is tailor-made to cause maximum damage.
This is nice.......
The beginnings of the legend that is Emmabung :)
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