There's a very popular daytime TV property programme over here in the UK called 'Homes Under the Hammer' in which a couple of very chummy TV presenters follow the progress of members of the public buying properties at auction and doing them up for what they hope will be a decent profit. Despite a dodgy period during the housing crash of 2008, most of these punters have done pretty well over the last few years. Many have borrowed large amounts of money to "bag a bargain at knock-down prices" as Martin and Lucy, the programme's presenters, would put it. In fact, those who bought in certain Central London hotspots have done exceedingly well - so far.
Of course, this little purple patch that the punters have been enjoying hasn't been purely the result of their skills at judging price movements in a truly free market. In fact, mortgage-holders generally have had quite a bit of help these past few years, namely from the Bank of England, the taxpayer and a huge indirect subsidy from the nation's hard-pressed savers.
Thanks to the Bank of England's ill-considered decision to slash interest rates to 0.5% three years ago, overexposed borrowers have been granted an extended and overly-generous stay of execution. However, last week, there were some ominous rumblings in the financial firmament and the first few storm clouds began to reappear over the UK housing market.
Despite the fact that the economic illiterates on the Bank of England's Monetary Policy Committee kept base rate at the "emergency level" of 0.5% for the third year running, the main high street banks decided to ignore them and raise their mortgage rates anyway from between 0.5% to 1%. As a result, hundreds of pounds a year have been added to the average mortgage payment. That's going to be a real shocker to all those people who got in too deep to buy too much house - not least to all those punters in the auction rooms relying on interest-only deals to fund their speculative purchases.
There are a few other straws in the wind suggesting that the future of over-indebted mortgage holders, and by extension the housing market as a whole, is not a pretty one.
If we take a look at the Halifax house price index, we see that there was an initial sharp drop in the market in 2008, followed by a recovery through to 2010. Since then, the downtrend in average prices has resumed. Granted, some parts of the Central London market are still on fire as desperate Greeks and Italians seek an escape from the euro turmoil and look to shelter some of their under-taxed wealth in prime London postcodes. All that does is highlight how grim the picture is in the rest of the country - and it's getting grimmer by the day. Is that any great surprise when the average Brit is faced with rising unemployment, wage freezes, VAT increases, rising student debts, rising food costs and petrol prices at an all-time high?
Even in my relatively wealthy part of Gloucestershire where house prices rarely fall, I've noticed a significant weakening in the market lately.
All this is very depressing and I would feel a modicum of sympathy for the plight of overambitious homebuyers seeking lifestyles beyond their means if it wasn't for one small detail: private pensioners suffering drastic falls in annuity rates and prudent savers like me (who outnumber borrowers by 6-1 by the way) have been subsidising their extravagant indulgences for 3 whole years now.
In fact, according to Simon Rose, a campaigner for the Save Our Savers movement, during this period £100 billion has been transferred from savers to borrowers. As Mr. Rose so tellingly illustrates, £100 billion is ten times the cost of the London Olympic Games!
So things may be looking grim at the moment for those of us trying to provide for our futures and avoid becoming a burden on the state in our dotage, but every dog has its day - and it looks as though the major high street banks may have just tossed us a bone because it wasn't just mortgage rates that went up last week. I've also noticed that savings rates have been steadily creeping up over the last month or two.
I'm not getting overexcited just yet because I don't expect average building society rates to revert to offering real above-inflation returns anytime soon, but there are an increasing number of instant access accounts and ISAs out there now offering 3% or slightly above.
So with both mortgage and savings rates on the rise, it looks like the actions, or should I say inactions, of the Bank of England Monetary Policy Committee are increasingly becoming an irrelevance in the real world. In effect, the Bank of England is losing control of interest rates.
To explain the Bank's faltering grip on events and why, in my opinion, the MPC should do us all a favour and not bother turning up for work next month, we have to take a look at that mysterious financial phenomenon known as LIBOR. LIBOR, or the London Interbank Offered Rate, determines interest rates in what are called the wholesale money markets. In effect, it dictates the rate at which banks lend to each other. When funds are plentiful and confidence is high, LIBOR is very low, but when there is stress in the system and banks start to question their counterparties' solvency as they are now, LIBOR starts to rise. As a result of the growing upheaval in the euro zone lately, trust between banks has been undermined and LIBOR has started rising. Since LIBOR dictates long-term interest rates, they have an immediate effect on UK mortgage rates.
The fact that so many UK high-street lenders rely on the wholesale markets to fund mortgages, and the fact that these markets are becoming harder to access does have a silver lining for savers. Because if banks can't get capital from the wholesale markets, they're forced to go cap in hand to their traditional source of mortgage funding - their hitherto used and abused savers. If those banks want my capital so they can lend it to yet another cohort of overambitious borrowers, I for one am going to make them pay for the privilege and I suggest you do the same.
Now more than ever, when the banks have finally re-discovered how much they need savers like us, we should push them hard and take the trouble to shop around for the best savings deal. Yes I know it's a faff to keep shifting your money around every year or so, but the more of us who take action, the more we can press home our advantage and finally create a truly competitive savings market.
As for those overstretched mortgage borrowers, the waning of the Central Bankers' influence over interest rates and the gradual reestablishment of free market principles in the money markets could mean that many of them will soon be swapping their cosy Cotswold cottages for a cardboard box and a railway arch. That doesn't sound fair, I know, but then it wasn't fair that recent retirees have seen their annuities cut in half over the last few years either thanks to artificially low interest rates.
Let's also not forget that many of those avaricious homebuyers were quite happy to take advantage of free markets on the way up but were squealing very loudly for the government to "do something" when the market looked like it might implode and turn their property dreams to dust.
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