In its Quarterly Economic Bulletin, the AMI belives that the nature of the market means previous rises have yet to make a full impact on consumers. It also predicts that the housing market has also slowed but is not expected to crash and that the sub-prime problems in the USA will impact over here but that continued demand means the industry will continue to grow.
Chris Cummings, director general of AMI, commented: “The enduring strength of the UK economy in the face of rising interest rates is justifiably raising fears of policy overkill if the delayed impact of tighter monetary conditions suddenly kicks in. Another increase in base rates to 6 per cent is inevitable given the strength of the key indicators. If rates rise as soon as September, then another increase (possibly in November) to 6.25 per cent would become more likely.”
Industry figures show the price of new homes has begun to stall. The Government has also recently announced plans for higher house building targets.
Cummings said: “None of the figures suggest we are heading for a housing crash as low unemployment, supply shortages and strong GDP will underpin demand. So far this seems to be the beginnings of an orderly deceleration in the market. The concern is that the higher interest rates seemingly needed elsewhere in the economy may put excessive pressure on the housing market.
“Without significant reform of planning legislation to reduce the power of local authorities we are sceptical that the ambitious target of 240,000 new homes per year can be met. Presently the UK is managing to construct around 160,000, some way below the growth in households of around 200,000 per annum. In addition, many of the planned areas of expansion are on flood plains. For example, 160,000 new homes are planned to be built on the Thames gateway by 2016. With weather patterns becoming less predictable and sea levels rising, damage to properties that are vulnerable to flooding will become a growing problem. If this affects demand for properties in these areas, halts in development will mean house building targets will not be met.”
The fallout from the US sub-prime meltdown continues to dominate stories on the US economy implicating borrowers, lenders, regulators, investors and credit ratings agencies.
Cummings added: “None of the US conditions in sub-prime exist in the UK market so we are not going to see the same kind of sub-prime credit crunch. Nevertheless it is likely that sub-prime lending here will be affected by the problems across the Atlantic. This is because sub-prime relies on wholesale financing and spreads for riskier assets are widening. The investors who finance the sub-prime lenders are becoming increasingly risk averse and so expect a higher return for investing in sub-prime. However, there will always be a market for credit impaired borrowers. The key is for the risk to be priced appropriately and the credit criteria to be strict enough to protect the customers. Delinquency data on credit card and other unsecured borrowing has been climbing steadily. However, the mortgage market is not following the same pattern. Unless the UK is going to head into a recession, which is not what we expect, we are confident that we are not going to see a return to the pain of the early 1990s.”
