SO THE Bank of England has fired its biggest gun, known to the ranks as The Guv’nor, in a pre-emptive strike against the inflationary forces of the property market. The salvo has sent buyers and sellers running for cover. Should they reduce offers or withdraw them completely? Should they take their house off the market or accept a lower price? What we need now is Corporal Jones, to say: “Don’t panic.”
Members of the Bank’s Monetary Policy Committee have been gradually revealing their view on house prices at public speaking engagements outside the Bank’s walls.
They paint a very consistent picture: our premier economists are as confused as the rest of us. Houses look very expensive, but people still seem able to buy them because borrowing is cheap. Prices can’t go on rising like this for ever and should have slowed down by now, but they haven’t. So it was time to intervene to stop matters getting out of hand.
First came the two successive rises in interest rates, which the Bank would argue were aimed at the economy as a whole. Then came the speech by Mervyn King targeted directly at the housing market. The Governor didn’t say that the market was going to crash, as he emphasised the following day. Instead, he used all the powers vested in his office to suggest we curb our buying and borrowing habits now, in order to prevent a crash from happening further down the line.
As he mentioned in his less well-publicised paragraphs, there is evidence that the market is calming down already. The dial has turned from hot to cool; his intervention shows that we are now entering the spin cycle.
As regular readers of The Times are aware, several estate agency surveys have shown that the market started to get stickier in May. Homes in the middle to upper market are selling more slowly, as buyers become nervous of overstretching themselves. Asking prices are coming down. First-time buyers are disappearing from the scene.
This week’s monthly report from the National Association of Estate Agents showed that the number of new buyers has fallen. It was the third report in a fortnight to show that demand was already dropping, even before last week’s interest rate rise.
One of the most detailed property surveys is the monthly report from about 300 estate agent members of the Royal Institution of Chartered Surveyors. This week it reported that buyers and sales were down, particularly in southeast England and East Anglia.
This shift in climate has yet to come through in the Halifax and Nationwide indexes, which have been surging on the back of the property boom in the North. But here, too, there are signs that it is coming off the boil.
Nowhere was the market hotter than in the auction rooms of Liverpool, Manchester and Leeds in the early months of this year. Since February 700 people have been turning up for Eddisons’ auctions at Elland Road football stadium in Leeds. Last week only 200 came. They still paid good prices — £5.5 million of property was sold — but there was no longer a frenzy.
Tony Webber, the auctioneer, said the bidding was cautious, with some properties failing to meet the reserve price. Commercial investments and good-quality residential portfolios sold well to seasoned professionals who have been in the game a long time. The people missing were the amateurs.
“In the residential buy-to-let sector, where every man and his dog has been buying, things have slowed down,” he said. “We have had the benefit of buyers coming up from London when the market bottomed out. There are still some there, but they are not bidding as bullishly. There is a sense that we have reached a limit, that the North has played itself out.”
Investor buyers have been paying double the guide price at auctions across the North for terraced houses in districts they had never visited.
Never mind the fundamentals of location and rental income, they bought anything at any price, in the belief that it could always be sold for more the next month.
That was exactly the mindset which prevailed immediately before the market crashed last time round and which economists at the Bank are desperate to change. They believe one of the strongest drivers behind this year’s house price surge has been the belief that prices can only go up. Buyers have been pricing in future gains to their current buying equation.
This week’s speech was designed to destroy that faith and focus attention back on those fundamentals. It was timed to come after two interest rate rises and just before the market heads into the summer season, when activity is generally quieter.
The Bank has played its trump card. Now it must wait to see how the market responds.