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Will global economic issues affect the UK property market?
Since the turn of the year, the UK property market has been doing rather well for itself. The stagnation of the sector seen during the majority of 2005 gave way to a mini-boom, as buyers returned to the market and prices began to increase once more.
However, latest figures have begun to suggest that the property market may be set for another period of consolidation and a reduction in property price inflation. And there seem to be a number of major factors affecting this slowdown, not least the situation in other countries across the globe.
Rumours of a potential increase in interest rates by the Bank of England have helped to stem the flood of new buyers in the property market, as people wait to see what the bank's next move will be. After the bank's monetary policy committee (MPC) reduced interest rates last year by a quarter point, many analysts initially suggested that a further cut might be required in the early months of 2006 to ensure sustained economic growth across the country. However, that did not materialise, as the market proved more robust than the experts originally predicted. That has led to many suggesting that the next move in interest rates will be up, rather than down.
Such predictions have emerged thanks to a number of factors originating across the world. For example, the FTSE 100 Index has suffered a number of dips in recent weeks, with two per cent being wiped off its value on Tuesday June 13th alone. One of the main reasons for this drop was the threat of increased interest rates in the US economy, which had a knock-on effect on the world's investors. Interest rates are clearly key to the housing market and uncertainty surrounding them in one major country, such as America, can have serious implications for the UK market.
Mervyn King, governor of the Bank of England, has warned that the global economy is seeing increasing inflation. While he insisted that this would not necessarily impact on the UK market, he added that the threat of outside forces are now the most important area of influence on the UK economic climate.
In a speech in Scotland, Mr King explained: "There are some signs of inflationary pressures in the main industrial countries." This could have an impact on the UK's own inflation. While this has been somewhat volatile in recent months, Mr King noted that it has remained relatively close to the government's target of two per cent. This means that the bank would not be seeking to push up interest rates in the near future, because as long as the country's inflation rate remains in line with the government's target, it will not need to be curbed.
However, as inflation across Europe and other parts of the world continues to grow, the UK economy will become increasingly vulnerable to a sudden spurt in inflation. This would result in the bank's MPC moving to reduce inflation by putting up interest rates, which in turn would have a significant impact on the property market. As the base rate increases, the ability for first time buyers to get onto the property ladder will become increasingly difficult, while many will begin the waiting game, as they look for the market to fall and will only buy when they believe it has bottomed out.
Therefore, the inflation rates in other countries will be pertinent to the UK property market over the coming months. However, it is also possible that the current speculation over interest rates could have a similarly negative effect on the property market. This is because many people will wait to see where the property market will go and what will happen with interest rates before moving into the market. In that way, the market could find that it is damaged internally, as people worry too much about outside market forces and end up forcing prices down by the lack of movement in the UK property market.
Europe will have a significant bearing on the UK's property market, as an economic recovery has begun to take hold in the eurozone. With that recovery, the European Central Bank (ECB) has voted to raise its interest rates by a quarter point, to 2.75 per cent. With European inflation rising rapidly in recent months, the UK could see a similar growth take hold, in which case interest rate movements will be necessary.
High energy prices have contributed to the jump in inflation across both Europe and the US in recent months, as unstable countries such as Iraq and Iran continue to hog large reserves of oil. While Iraq continues to suffer daily attacks from insurgents, Iran's anti-western policies have seen threats that it might cut off its oil supply to the rest of the world. This instability has had a devastating effect on oil prices across the globe and these high costs have been driving up inflation for all industrialised countries.
Further afield, China is also proving to be a potential problem, as the country continues its massive strides in economic development. The country has undergone a major transformation in recent years from a Communist state closed off to the rest of the world, to a more open (although still Communist) regime which has embraced certain elements of capitalism. And the country is flourishing because of those changes. However, while in past years the importing of cheap Chinese merchandise has allowed the UK to maintain low inflation in terms of consumer goods such as electronics, that situation looks set to come to an end.
The world is beginning to see higher Chinese export price inflation, which could push up UK inflation. While more expensive electrical goods may not seem likely to have an impact on the UK's property market, the fact is that such increases will result in greater inflation and a required increase of interest rates.
However, despite the concerns surrounding the global market, the UK has managed to avoid being dragged into trouble before. For example, during the depression which hit many countries after September 11th 2001, including major economies such as the US and Germany, the UK managed to pull through largely unscathed. The property market certainly remained intact and full of confidence.
But this time could be different for the property market for one crucial reason: it has already been showing signs of weakness. Whereas in 2001 the property market was going strong and had been for some time, in 2006 the market has been slowly recovering from a shaky 2005. This could leave the sector more susceptible to outside forces, with inflation seemingly the most likely to have an impact. That is why the bank's MPC will be closely watched over the months ahead for any indication as to whether interest rates will be raised.
24 Jul 2006
