As UK interest rates peak house prices start to fall

The Bank of England’s recent quarterly report on inflation said risks to growth and inflation were “somewhat on the downside” bolstering the widely-held view that UK interest rates have peaked. Partly as a result of this, sterling has fallen in value against the euro to a 10-month low and a 15-month low against the swiss franc.
The Bank of England also predicted in the same report that Britain’s housing market faces “a period of falling prices” in its public forecast of a decline in this sector. The statement marks a departure from its previous view that there would be a more orderly slowdown in the country’s booming housing market.
Mervyn King, the Bank of England’s Governor, said: “Our central view is based on the fact that the ratio of house prices to earnings is unsustainably high and will adjust over the next two to three years.”
His remarks follow a series of official and industry surveys noting a marked slowing in the housing market that has followed the doubling of prices over the past five years. The dramatic rise in house prices prompted the bank to raise interest rates five times over the past year or so, to the current level of 4.75%.
High housing costs have also become a potential issue as policymakers are increasingly concerned that key workers, such as teachers and nurses, have been priced out of many markets, especially London.
The change of outlook on the housing market combined with caution on prospects for the UK economy generally, prompted the pound to fall as investors expected no further interest rate rises in the near future.
Inflation, which does not include house prices, fell to 1.1% in September, well below the Bank’s target of 2%. While the Bank of England report predicted prices would “fall modestly for a period”, Mr. King took a more guarded stance when talking to reporters: “There may be many ways in which the housing market could adjust. It could well adjust in ways that include no falls in house prices at all – only time will tell”, he said.
The Bank also slightly changed its forecast for UK economic growth as a whole, saying that “the economy has gone through a softer patch in recent months.” It appears that the economy has lost some of its momentum through the autumn.
The raising of UK interest rates, which were always viewed as an attempt to cool the housing market, has had a marked effect on the economy as homeowners are faced with higher costs on their mortgages with less money to spend in the High Street.

Spanish Property Market
It would appear that the above situation is also having an effect on the demand for Spanish properties by UK expatriates. Whether prices are stable or falling and by how much, will depend on who you are talking to!
What, however, does seem likely, is that with the UK economy in decline and interest rates more likely to fall than rise, sterling may well fall further against the euro. If this happened it would inevitably raise the cost of buying Spanish property for UK-based investors.
During the past twelve years since I moved to Spain, the lure of the Spanish Costas has gone unabated for many northern European baby boomers and I am sure that the expansion will continue for many years to come. However, my radar screen indicates that, as an investment, nothing goes up in a straight line and a correction in Spanish house prices seems likely over the next two to three years.

What should you do
Over the past three to five years many expatriates living in Spain have made further investments into the property market that have stood them in good stead during a period when other financial markets have been in decline. The selection of our “Six of the Best” low-risk and euro-based investments widely promoted on the Spanish Costas over the past three years (with the exception of one that has had a temporary knock), have produced good euro returns averaging around 7%. Furthermore, Henry Woods’ advice in recommending that investors switch to the euro from sterling (a view we still hold) has, because of the rise in the euro, enhanced the returns even further.
So, with western equity markets by no means a safe bet, and residential property in the same camp, consideration should be given to a mixture of high-yielding bonds, commercial property and other alternative investments such as included in Henry Woods’ selection of “Six of the Best” investments.