Maybe house prices should fall…

May 12th, 2008

For months now the media, the press and indeed this very blog have been awash with pessimistic talk of a house price crash. Fears of negative equity once again stalking the land have led to many commentators anxiously watching the house prices indices and proclaiming boom or bust with each incremental move.

However, a new poll commissioned by the BBC has suggested that many people believe house prices should fall, slightly, before beginning to climb again at a more sensible rate.

The poll of 1,005 people found that only 22% said they wanted prices to go up while 28% said they wanted house prices to fall. The poll, carried out by ICM, canvassed people over a three-day period from 25 to 27 April.

Nearly half of the people who responded, or 46%, said they wanted them to stay the same. The findings cast doubt on whether the political and economic damage done by falling prices is as serious as has been feared.

Price falls bring economic benefits not just to first-time buyers but to any homeowner who wants to trade up to a larger or more valuable property. The price of the place they are selling may fall. But, all else being equal, the more valuable property they want to buy will fall by a larger amount, meaning they have to borrow less to ‘climb’ the property ladder.

Economists are concerned that if prices fall too quickly it may knock consumer confidence, already at its lowest for 15 years, leading to reduced spending that could worsen the current economic slowdown

However, another finding for the poll questions whether it is house price falls that have damaged consumer confidence as opposed to other factors such as food, fuel and mortgage payments.

Respondents were asked if a fall in house prices of more than 10% would make them more likely to cut back on household spending such as clothes, leisure and groceries.

More than 60% of people said it would either make no difference or would make them likely to spend more. Only a minority, 38%, said it would make them more likely to cut back.

In a way this poll is stating the obvious, a small fall in house prices, known as a correction, would be good for the housing market which, especially in the South-East, has been overheating recently. However, a rapid and extreme fall in prices would be a crash and then negative equity would begin to destroy peoples finances in a way not seen for over a decade.

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Facebook Credit Adverts ‘Break The Rules’

May 12th, 2008

The social networking site Facebook, which is primarily aimed at teenagers and young adults, has been criticised recently for allowing the irresponsible advertising of credit and borrowing opportunities.

Credit Action, the campaigning debt pressure group, says adverts promising cheap loans for people with poor credit ratings are appearing on the site and many break advertising regulations.

In particular, adverts are promoting two new products, payday loans secured against a salary or logbook loans secured against a car, the group says and has made a complaint to the Office of Fair Trading (OFT).

The adverts contravene British law which states that adverts for credit services must clearly state the interest rate available, which the Facebook adverts do not. Some have even claimed to be misleading.

Social networking sites, Facebook in particular, have become hugely popular in recent times. Popularity amongst general users has been matched by interest in companies wishing to use this new medium to promote their brand and generate sales. Advertising revenues have made billions for the founders of the site, although they still claim that the user experience is their first priority.

However, lots of credit companies, especially payday and logbook loans companies, are using the medium to advertise their products. It is such a popular method because they can target the young people with whom the site is so popular. Credit adverts are strictly regulated in the traditional media and so Facebook and other such sites provide a means for companies to reach audiences previously untouched.

Credit Action have released a statement saying, ‘the rules are there for a reason. They are there to make it clear to people from the beginning what they are letting themselves in for.’

The adverts come at a time when traditional lending is becoming ever more difficult and there are concerns that the adverts are designed to attract vulnerable young people who see it as an easy way of raising money quickly when in fact they are being trapped in a spiral of serious debt.

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Interest rates hold at 5%

May 8th, 2008

As widely expected, today the Monetary Policy Committee (MPC) of the Bank of England has held interest rates at their current levels, 5%. The decision not to change rates despite a further barrage of unsettling economic news this week demonstrates that the committee still has worries about inflation, as witnessed by rising oil prices.

A spokesman for the Confederation of British Industry said, ‘the latest data shows the economy is slowing, albeit only gradually, and at the same time inflationary pressures continue to mount. The Bank faced a difficult decision, but it is no surprise that rates were kept on hold this month.’

Meanwhile the body representing
Britain’s manufacturers, the EEF, said that the decision to hold rates was only delaying an inevitable cut. ‘The economy has been through a series of shocks since the credit crisis hit last summer and the Bank has been right so far in responding with a measured approach on rates.’

The British Chambers of Commerce (BCC) argued that a rate cut would have underpinned business and consumer confidence and helped limit the potential damage to the economy. ‘This decision was a mistake given the serious threats to economic growth.’

Homeowners had been hoping for rate cut which, if it had been passed on by lenders, may have seen some people’s mortgage payments reduced.

However, the credit crisis has made funding mortgages trickier for banks, and when interest rates were cut to 5% from 5.25% last month, not all lenders passed on the full reduction to borrowers, despite government pleas.

Negative manufacturing and service sector data released this week had led some to speculate that the Bank might decide to cut rates this month.

The most recent available data showed that Consumer Prices Index inflation was 2.5% in March, holding steady from February, but well ahead of the government’s 2% target.

On Wednesday, the British Retail Consortium said food prices in April were up 4.7% compared with a year ago, although falling prices of non-food items meant that shop prices overall were up by 1.2%.

The conclusion must be that to resist inflation the MPC made the right decision today, homeowners will have to wait until next month for a cut that might ease their burden.

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