8/27/07

Title of Article: Five rate rises bring housing boom to August standstill
Source: The Guardian (8/27/07)
Link: http://business.guardian.co.uk/story/0,,2156784,00.html#article_continue

As per our discussion in class today with the UK (and US) housing market status, I found it rather fitting to use this article I found on the Guardian online website as my journal entry for the day. According to the article, five interest rate rises in just a year has caused the once booming and successful house-price market to record its slowest growth in twenty months for the month of August. Hometrack, the housing intelligence company, warns consumers of a weaker market in the months to come if nothing is done about this recent slow growth rate in house prices.

Richard Donnell, Hometrack's head of research, reports that the increase in interest rates over the past twelve months has pushed the average debt servicing costs to a fifteen-year high. High interest rates will most likely continue to hinder market activity levels as well as have an effect on house price inflation for the next twelve to eighteen months.

London has been the driving force behind the market boom, but now even this city is faltering. London still recorded a rise in prices in August, but this 0.1% increase is very minimal compared to the 1.8% increase seen in March.

Apparently, this slower growth in property prices has been going on for quite some time. In June, 27.9% of postal districts saw an increase in prices. This percentage dropped to 14.6 in July and dropped even more in August to 9.3%. Buyer confidence is weakening now which will, according to Donnell, create a snowball effect in which the market sentiment will be further underminded followed by weaker levels of demand and ultimately causing the rate of house price growth to become further underminded as well.

A sign of a weaker market is a decrease in the amount of people able to secure the asking price of their home. If this falls below 94%, there will be a greater chance of small month on month falls in underlying prices. The amount of people able to secure the asking price of their home was at a recent high of 95.6%; it has since fallen to 94.9%. With this, if this percentage gets much lower, the UK housing market may be seeing a smaller fall in underlying prices.

In my opinion, the housing market needs to lower their interest rates so that buyer confidence will rise once again and asking prices will be achieved. Increasing the interest rates increases the cost of money, so no wonder no one is buying and everything is at a stand still. They need to revamp the weak market, increase the percentage of postal districts seeing an increase in prices, and lower the average debt servicing costs. Lowering interest rates, however, may cause higher inflation, so a happy medium between interest rates and inflation needs to be reached. Maybe if interest rates were lowered just enough so that the inflation would balance with the rates, then the market can return back to its booming and successful self.