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  1. 4,217 Posts.
    Buyer beware.

    In the past, the Bank has expressed a view that the consumer exuberance 'would slow of its own accord'. Indeed, the most significant domestic economic trend this year has been the fall in take-home pay. Real wages, after taking into account inflation and tax rises, have fallen between 0.5 and 1 per cent. But instead of a generalised fall in high street spending, Britain has gone out and borrowed even more, fuelling a surge in September retail sales.

    In the past few months the housing market has shown renewed vigour. Friday's figures showed average prices were up 2 per cent during October, or 16.1 per cent on the year. So this week the Bank is almost certain to step in and stop the party getting out of hand. But what will this do to the housing market?

    Interest in fixed-rate deals is already increasing; about 65 per cent of new mortgages in the past few months have been fixed rate, according to the Council of Mortgage Lenders. But 75 per cent of all mortgages and 90 per cent of unsecured borrowing still varies with the Bank of England rate. For almost four years that variability has been good for consumers as base rates were cut back from 6 per cent to the current 48-year low of 3.5 per cent.

    Millions of homeowners will struggle with the idea that there has been much wrong with the housing market. Property has evolved from its primary role as a habitat into a financial instrument par excellence. The home is now a secondary or even a primary pension for millions of Britons. And in the past two years, record levels of mortgage equity withdrawal - running at £40 billion a year - have turned the home into a surrogate pay packet. This Christmas, many a plump turkey, packed stocking, DVD and winter break will have been funded by cashing-in on record house price growth.

    Inevitably, such spending, particularly when it is not targeted at increasing the value of the house, will have greatly increased homeowners' vulnerability to increasing rates.

    'The strength of this week's housing data - record lending and approvals plus the price rise - seals the case for a rate hike in November,' says Michael Hume, UK economist at Lehman Brothers. 'However, in a medium-term sense, they also raise the chances of a sharper correction in house prices.'

    But surely the predicted modest rise in base rates - a quarter point this week, slowly reaching 5 per cent by the end of next year - is peanuts compared to the 12 per cent summit reached in 1992. No one is suggesting that rates will scale those skyscraper-like heights. However, economists point out that even small rises from the Bank could have a huge effect on confidence and on spending.

    HSBC's UK economist John Butler, says that very high levels of debt mean interest rates do not have to go up much to cause considerable pain. He has calculated that rates of 5 or 6 per cent next year will hamper the consumer as much as 10 or 12 per cent rates did in 1990.

    'The UK consumer is not only more sensitive to adverse shocks than in the past, but also more exposed to rate changes,' he says. 'A rapid upward revision to rate expectations when real wages are falling, could undermine the consumer, drive up sterling and possibly derail any recovery.'

    Capital Economics says its predictions of a 20 per cent fall are based on the fact that current prices are way out of kilter with historical market metrics.

    'House price/earnings ratios are now 5.5 times - they've never been that before,' says Stansfield. 'The lifeblood of the housing market is draining because of a slump in first-time buyers. They now make up around 30 per cent of the market, rather than 50 per cent.'

    It's been a free lunch for a decade. This week the first instalment of the bill may arrive.

 
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