Despite continued pessimism in some quarters of the market, the statistics point to similar turning points in the UK; with Nationwide reporting
price rises of 0.9% in June and the Bank of England announcing four months in a row of
rising mortgage approvals in May.
Shouldn't we be concentrating on something else?
Many people (although hopefully not too many readers of these newsletters) can be forgiven for wishing journalists and commentators would simply shut up for a while about the trends in the housing and mortgage markets and concentrate on more important things like reducing unemployment and improving healthcare.
I am also particularly worried about the crazy tax burdens in Ireland - €13 billion was collected via income tax in 2008 (it will be less in 2009) but the government is about to pay €50-70 billion for the bad assets in our banking system. You know what they say - €10 billion here and €10 billion there and before you know it, we're talking real money.
Link between house prices and consumer spending
However, and whether we like it or not, the focus on the housing market needs to continue because it has direct links to many other industries and house prices directly affect consumer spending. Simply put, if people know that their house is increasing in value, they will tend to spend more money (and vice versa). In economic jargon, this is referred to as the
Wealth Effect and it is very influential. The economic policy models of the Fed Reserve assume that a person whose house appreciates by $100,000 will increase his spending by the same proportion as a person who receives an extra $100,000 in stocks, shares and regular income.
Declining house prices also limit a banks willingness to lend money - not just for houses but also for cars, business start ups, holidays and general investment. Far too many people who should have known better lost sight of these forces.
Next month will mark the 2nd anniversary of the credit crunch believe or not, and as Fiona Redden of the
Irish Times has pointed out, this is as good a time as any to reflect on what lessons can be (re)learned. Among other things, she recommends a diverse portfolio, that we know when to cut our losses and take our profits, that we purchase a property based on predicted capital appreciation & rental income rather than add on incentives and that we always maintain a cash reserve.
Warren Buffet himself would be proud of such homespun wisdom Fiona.
Kind Regards
