The Jonathan Davis Column
Saturday 27 June 1998
As it happens, there have been some interesting recent developments in all these different markets. Take the housing market, for example, which seems to be sending out all sorts of conflicting signals. The puzzle here - which has been exercising the Bank of England's monetary policy committee among others - is whether house prices are currently rising by around five per cent a year (which would be perfectly normal) or at roughly twice that rate (which would set alarm bells ringing).
The two house price indices followed by most economists are produced by Halifax and Nationwide. The trouble is that they are both giving out competing signals. Since the end of 1996 the Nationwide series has consistently produced higher figures for house price inflation than the Halifax series. Its most recent figures suggest that house prices are rising at around 12 per cent per annum, against the five per cent recorded by the Halifax.
The reason for the discrepancy appears to be either a purely technical one (based on the way the two indices are calculated) or a reflection of the different lending characteristics of the two lenders. Halifax is much stronger in the North of England than Nationwide, and one possibility is that the divergent trend is telling us only that house prices are simply rising faster in the South - something which appears to be borne out by all anecdotal and other evidence.
Whatever the reason, it is something which could have a bearing on the cost of your mortgage. The Bank's monetary policy committee, which sets interest rates, is known to be concerned about the impact which rising asset prices could have on consumer demand and future inflation. The strong performance of the stock market over the last three years is one concern, but the housing market is even more important a component of national wealth - and any suggestion that it was getting overheated would reinforce the case for raising interest rates as a pre-emptive strike against future inflation.
The current state of sentiment in the gilts market is also a factor in future mortgage costs. For while short term interest rates are rising, long term interest rates (as measured by the price of gilts) continue to weaken, furthering the long downward march of the last few years. The importance of this trend is that most fixed rate mortgages are funded by gilts while variable rate mortgages tend to track changes in short term interest rates.
The difference in cost between fixed and variable rate loans therefore tends to reflect the difference in short and medium to long term interest rates. So do not be surprised, for example, if the next few weeks see a flurry of attractive looking fixed rate deals.
Before signing on, however, it is worth remembering that the reason fixed rate loans will look so attractive in cost terms is because longer term interest rates are falling - and if the markets are correct to assume that interest rates will come down over the next two to three years, as gilt prices suggest, then as variable rates start to come down the less valuable your fixed rate will actually be over that period.
Only if you have good reason to believe that the fundamental trend in interest rates is upwards are you really likely to benefit from a fixed rate loan in economic terms. The most obvious reason for thinking that interest rates are set to rise over the next 2-3 years is if you have a gloomier view of inflation than the market is currently incorporating. That would not necessarily be wrong - inflationary expectations have been falling steadily for a number of years, and that could well change before too long.
One sidelight on future inflation prospects is given by the performance of index-linked gilts, which I recommended two years ago, and which have since performed very strongly. They have proved very popular with institutional investors in the last couple of years. Here too, however, there are puzzles. As the chart shows, the yield on index-linked gilts has fallen to under three per cent.
It means that index-linked gilts are now yielding well over 0.5 per cent less than their equivalent in the United States, even though most experts agree inflation in the States is much more under control than it is over here. (Perhaps because index-linked bonds were introduced in the States for the first time last year and investors are just becoming used to valuing them).
Another oddity is that shares have, for most of this year, yielded even less than index-linked gilts, reversing the traditional relationship, and apparently defying the logic of investment theory which suggests that shares - as the riskier asset - should provide the greater return.
My take on all this is that these conflicting signals tell us more about the overvaluation of the stock market than they do about the inherent attraction of index-linked gilts at these prices. What is clear is that the policymakers in both the US and the UK are becoming concerned about the valuation of the stock market. The monetary policy committee of the Bank of England, in the minutes of its May meeting, allowed this classic piece of obfuscation: "The negative skewness in the FT-SE probability density functions has increased recently, reflecting a greater probability attached to a sharp fall".
What it means is that they think shares are likely to fall - which, if it happens, will probably sort out the valuation anomaly with index-linked gilts, and quite possibly help to bring the Halifax and Nationwide house price indices back into line as well.
Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk
Buying property overseas? Check out these hotspots
Bargain Hunter: Exclusive discount on a SmartGlider - a self-balancing electric scooter
Kate Hudson's online sports brand Fabletics drains your account if you don't say 'stop'
House prices plummeting in London's most expensive boroughs, but going up in the suburbs
Peer-to-peer lending rates put Nisas to shame
- 1 Hair loss explained: How and why men go bald
- 2 Game of Thrones season 6: Jon Snow theorists believe the Stark may have a twin sister
- 3 Artist takes LSD, draws herself over different stages of the 9-hour trip to show its effects
- 4 A pint of water every day is the key to losing weight, scientists say
- 5 Russia 'accidentally reveals' number of its soldiers killed in eastern Ukraine
Dresden riots: Protesters in Germany attack refugee buses shouting 'foreigners out'
France train shooting: US soldiers speak of the moment they stopped gunman and 'beat him until he was unconscious'
Labour leadership: Jeremy Corbyn accused of 'deluding' young supporters with 'claptrap'
'Women only' train carriages: Jeremy Corbyn unveils radical move to tackle public harassment
Black holes are a passage to another universe, says Stephen Hawking
Iain Duncan Smith calls for urgent ESA overhaul as part of drive to cut down welfare costs
iJobs Money & Business
£13000 - £25000 per annum: Recruitment Genius: Would you like to be part of a ...
£20000 - £25000 per annum + competitive: SThree: Are you passionate about sale...
£25000 per annum + benefits: Ashdown Group: A large financial services company...
£20400 per annum: Ashdown Group: An established and highly reputable organisat...
Day In a Page
This four-bedroom home has an annexe accessed from the side of the house, with potential for improvement and conversion subject to the necessary permissions.
In the heart of the hamlet of Wardley, this five-bedroom period home offers countryside views and a stylish interior, with original features and open fireplaces.
Offering countryside views and landscaped gardens, this three-bedroom Grade II-listed lodge has a spacious conservatory and a large cellar that could serve as a workshop.
Set in approximately 1.5 acres, this four-bedroom home comes with a second, detached property that's currently used as an annexe.
In the hamlet of Newchurch, this former parish church is now a four-bedroom home complete with clock tower and eyrie.
Offering scenic views from a large balcony and sun terrace, this four-bedroom home has a wraparound garden and a heated swimming pool.
Offering views across the Humber and East Yorkshire Wolds from a glass panelled balcony, this four-bedroom barn-style home befits a life of leisure.
This four-bedroom home offers versatile accommodation with annexe potential; features include a hot tub, sauna and Norwegian BBQ hut.
Well-located for schools, colleges and the town centre, this contemporary thatched cottage offers flexible living space with six bedrooms.
Built in 1907, this four-bedroom Edwardian period home has been refurbished by the current owners, retaining many original period features.
Surrounded by landscaped gardens, this five-bedroom home offers living space across three floors.
This lovely country home in Burnham Market is currently run as a popular holiday cottage, with five en suite bedrooms and colourful gardens.
This three-bedroom 17th-century former village bakery is just a few miles from the East Sussex coast.
Set on a landscaped plot, this light and airy four-bedroom home comes with a log burner in the lounge, a fitted kitchen and an open-plan ground-floor layout.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Built on a former chapel site, this impressive four-bedroom home boasts balconies, stunning views and contemporary modern living.
This three-bedroom house is situated in a quiet mews and set over three floors. Features include glazed staircases and high ceilings.
A period townhouse set over four floors, this five-bedroom home was built in the 18th Century and retains many original features.
With five bedrooms, this spacious home offers beautiful gardens and modern interiors - set within the popular market town of Bingley.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
In the pretty market town of Bungay, this grade II-listed Mill House is arranged over four floors, offering four bedrooms and three reception areas.
This first-floor flat comes with two bedrooms, an impressive open-plan reception room and two lovely roof terraces.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Moored at Taggs Island and reached via a pretty garden, this two-bedroom houseboat has a vaulted reception room and skylit garden studio - currently a beauty salon.
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
A contemporary house spread over three storeys, this three-bedroom detached home has large sliding doors that open out to the River Quaggy.
Moored in Chelsea's Cheyne Walk, this houseboat offers two double bedrooms and a teak deck that's ideal for al-fresco dining.
This former village bakery, dating back to the 17th century, is now a three-bedroom detached home just a few miles from the East Sussex coast.
On the picturesque Isle of Man, this four-bedroom character home has a ground-floor shop that's currently run as a newsagents and a flat that would make an ideal holiday let.
In a new collection of flats, this first-floor two-bedroom apartment offers ample entertaining space and a prime view of Furze Green from a private balcony.
This three-bedroom stone-built cottage currently trades as the village store with a restaurant in the annexe and family accommodation on the upper floors.
Previously two semi-detached properties, this five-bedroom home is spread over three floors with a large breakfast kitchen, orangery, office and gym on the second floor.
This five-bedroom home enjoys countryside views over the Blyth estuary to Southwold, offering flexible living space with a ground-floor annexe - ideal for use as a holiday let.
Close to the market town of Eye, this four-bedroom detached home offers a double-height living room which takes the place of the original, 19th-century, chapel nave.
Dating back to the 19th century, this four-bedroom home needs modernising. Spanning three storeys, the red-brick house has a fireplace, a small terrace and a cellar.
Just outside of Cambridge, this single-storey home offers three double bedrooms, a living room with vaulted timber ceiling and ladder steps that lead to a mezzanine study area.
This six-bedroom Georgian home is on three floors with open fireplaces, a two oven Aga, an annexe, and cottage gardens with outbuildings and a car barn.
A former coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, an attached office, kennels and an outbuilding that's currently used as a gym.
Located beside an impressive Victorian viaduct, this four-bedroom home has an open-plan living area that is glazed on two sides, with skylights and high ceilings.
A former furniture workshop, this three-bedroom home has high ceilings and painted brick walls, in a village setting only fifteen miles from the coast.
This five-bedroom stone townhouse features a pine staircase and an Inglenuk fireplace, double doors from the lounge give access to an enclosed courtyard.
This five-bedroom, detached home blends traditional and modern design; the sleek kitchen features a gas hob and oven set within an exposed chimney breast.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B or countryside retreat, subject to change of use permissions.
This Grade II-listed three-bedroom home is situated on a private road, just a short walk from the sandy beaches of Frinton-on-Sea.
Less than five miles from Malmesbury, this four-bedroom cottage comes with equestrian facilities and gardens that extend to approximately three acres.
Spanning three storeys, this late-Victorian five-bedroom farmhouse is a spacious family home with a modern interior and B&B potential.
With an original church arch, this triplex one-bedroom church conversion has a light, spacious, feel and comes with a secure off-street parking space.
This recently-refurbished three-bedroom home has bi-folding doors that lead out to a decked seating area - ideal for alfresco dining this summer.