Confidence Trick
As expected, both the Nationwide and the Halifax reported monthly declines in house prices for April. According to the Nationwide, prices fell by 1.1% in the month giving an annual fall of 1.0%. The Halifax’s figures were broadly similar; a monthly fall of 1.3% and an annual decline of 0.9%. Coincidently April’s GfK/NOP consumer confidence survey was also released last week. They reported a balance of –24, more miserable than content, is the worst for over 12 years and is set to decline further.
The above figures will give policy makers a real headache. If consumers believe that now is not the right time to move house or make major purchases then no amount of Base Rate cuts will persuade them. Whilst a shortage of supply should underpin the housing market, further declines in prices are inevitable and this trend could last until mid 2009. More importantly, with recent spending financed partly from equity release house price declines coupled with a tight mortgage market will ensure that domestic demand falls. In today’s economic environment of static wages but rising prices for food and energy, the constriction in demand will be exacerbated further. Perhaps the most damaging trend is that of the poisoned banks’ demand for cash that is keeping money market rates artificially high. With 3-month libor at 5.78% and Base Rate at 5.00% any changes in monetary policy are negated by banks shrinking balance sheets. In the short-term we feel that monetary policy is now irrelevant and will remain so until those institutions carrying toxic paper raise the capital required to write-off the bulk of the losses. We should then see money market rates decline to levels more consistent with prevailing Base Rate. An easing of fiscal policy may also help but this won’t happen here.
The Bank of England meets this week and will announce on Thursday that Base Rate has been held at 5.00%.
05 / May / 2008