We know that the world’s central banks have started a round
Posted in General on 20. Oct, 2010
We know that the world’s central banks have started a round of increases in interest rates, though we don’t know how far and how fast this trend will run. This is happening against a background of firm but not outrageous oil prices. One of the absolutely central things the central banks will be watching will be the trend in energy prices and if these rise above present projections they will have to lean against them. In fact, low fuel prices, now turning up, have been one of the key features holding down US inflation through the winter.When one is dealing with profound political uncertainties one has to try and establish a range of outcomes, from the worst that can reasonable be conceived to the best that one can reasonably hope for. Looking at the oil market, all that is priced in at the moment seems to be that Opec will continue to be disciplined in its production, with perhaps a small premium to price in the unlikely possibility of a disruption to supply.The experience of the Gulf War, when there was only the briefest spike in the oil price, would seem to suggest that the market has got this right But the dangers are asymmetric In the very short term the price may well fall back.
But it is hard to see any set of circumstances where the underlying supply/demand ratio will become much more favourable and easy to see several where it could be less so.The conclusion is very simple: quite aside from any moral and political interest, the West in general and the US in particular have a profound economic interest in seeing stability return to the Middle East.. A fresh surge in property prices and another fall in rents have triggered fears of an imminent collapse in the speculative buy-to-let market. “People have been shipping money into the market – that’s the nature of a bubble.”A lot of properties have been bought as a speculative investment and are flooding into the rental market. That’s one of the problems we may find ourselves facing in the second half of the year.”Yesterday Halifax, the UK’s largest mortgage lender said the price of the average home rose 0.4 per cent in March, meaning that homes are now 16 per cent more expensive than a year ago.But according to the Royal Institution of Chartered Surveyors yields for landlords in the residential sector fell in the three months to January, their fifth successive quarterly fall.Mr Gabay said that as interest rates started to rise – JP Morgan believe they could hit 5 per cent this year – and rents continued to fall, investors would find it harder to pay the mortgage costs “People are maybe owning two or three properties each. If we get into a downturn then they are in trouble.”This warning is echoed within the industry. The Financial Services Authority is worried borrowers are over-reaching themselves.John Tiner, its managing director, warned recently of dangers in London and the South-east where the ratio of house prices to incomes is at late-1980s levels and where people are borrowing large multiples of their salaries.”This exposes investors to growing risk of market under-performance in these regions,” he told the Council of Mortgage Lenders (CML).”Investors should be clear-sighted about the possible difficulties they may face in cashing in their property in the event of a weak market.”According to RICS that weak market may have arrived in London, which together with the South-east, accounts for three-quarters of the market.
“A big increase in the number of investors in the buy-to-let market, static rents and lower demand combined to reduce profitability,” it said.It said demand for corporate lets in London, which makes up a third of the capital’s market, was “markedly” down, while there was a sharp rise in the supply of properties.Jeremy Leaf, the head of its residential lettings panel, said: “There is not much profit for landlords in the lettings market at the moment. The increase in availability caused by investors entering the buy-to-let market has had a big impact.”Hamptons International, a leading agent in southern England, said stocks of rental property had surged 40 per cent over the past 12 months while the number of new tenants had grown by just 6 per cent. It pointed out that arrears and repossessions for buy-to-lets were running at just half the level of the whole market.”Buy-to-let is one or two per cent of the mortgage market so it is pretty difficult to isolate what impact that would have on prices,” Bernard Clarke, a spokesman, said.”But it is more a southern phenomenon so there may be some localised areas where it would have more of an impact.”The CML advises investors to see buy-to-let as a long-term investment, perhaps as an extra pension, rather than an opportunity to make a quick buck.Bob Pannell, its head of research, said it would be sustained by net immigration, family break-ups and the trend for people to carry on renting until later in life.”Interest in buy-to-let is likely to remain strong,” he said. “But as the UK experiences a weaker economy investors will realise the fantastic returns enjoyed in the mid to late 1990s were the exception.”Alex Bannister, the chief economist at Nationwide building society, agreed.