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; request a free guide on NISAs from Hargreaves Lansdown
Mark Dampier: Don't panic. Canny investors sit tight when the stock market falls
Shareholders can hold a company to account
Derek Pain: Dividends ease the suffering in a moribund stock market
Questions of Cash: Payment woes with Barclays overshadow Cornish holiday
Bank-beating exchange rates on your international payments
- 1 McKamey Manor: This 'extreme' haunted house is the stuff of nightmares
- 2 Russell Brand says he will 'probably' give up acting to focus on his revolution
- 3 Watch what happened when food critics were unknowingly served McDonald's
- 4 David Beckham's Haig Club whisky is exactly what’s wrong with the Highlands
- 5 Ottawa shootings: Bruce MacKinnon's cartoon is the perfect tribute to soldier Nathan Cirillo
Of course, teenage girls need role models – but not like beauty vlogger Zoella
Cameron is warned 'no possibility' of UK reducing immigration and that bid to bring in quota on migrant workers would be illegal
Support for EU membership 'at highest level since 1991' with most Brits wanting to stay 'in'
Tony Blair 'says Ed Miliband will lose 2015 general election'
Thousands with degenerative conditions classified as 'fit to work in future' – despite no possibility of improvement
Putin: The US is to blame for almost all the world's major conflicts
iJobs Money & Business
£60000 per annum: Ashdown Group: Compensation and Benefits Manager - Compensat...
£30000 - £35000 Per Annum plus excellent benefits: Clearwater People Solutions...
£24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...
£50000 - £90000 per annum + benefits: Ampersand Consulting LLP: Markit EDM (CA...
Day In a Page
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village