Property prices only going one way

Prospective homebuyers who need a mortgage for their next home should pay careful attention to a string of tweets by Jesse Columbo (http://www.thebubblebubble.com), the New York analyst who accurately predicted the current financial crisis back in 2004.

Columbo criticises studies that claim housing affordability is near an all-time high, pointing out that property buying is only manageable because of unsustainably-low mortgage rates.

He tweets: “People who are buying a home now (w/low mortgage rates) will experience the VERY opposite of what early 80s homebuyers experienced.”

And continues: “So, housing prices are still near historic highs (despite ’08), but mortgage rates are at historic lows….housing can only drop from here.”

He’s talking about the US property market, but I can’t help thinking the same goes for UK property.

Mortgage rates have hit new lows, even on high loan to value ratio loans: Marsden building Society, for example, is offering loans fixed at 3.99% for two years for borrowers with just a 10% deposit. No wonder that first time buyers are flocking back to the market – the CML this week reported that during 2012 first time buyer numbers rose to their highest level in five years.

The cause is clearly the government’s funding for lending scheme, which provides cheap money for banks so long as they lend it on to homebuyers and small businesses. The government hopes that by kick starting the housing market, it can prod the economy back to life.

That’s all well and good – but is it right to enable and encourage people to buy their first home at a time when property prices are still high and have started rising again, and mortgage rates are at rock bottom. As Columbo points out, interest rates can only go in one direction.

Many economists expect the base rate to stay at 0.5% until well into 2016. But when it does rise, the effect on property prices could be catastrophic.