Investment bank ABN Amro has expressed concerns that the increase in borrowing costs could cause a housing slump on a global scale.
People have taken on ‘unsustainably large’ mortgages which will leave them exposed to harp increases in bond yields and bank base rates as seen in the UK, and more recently in the European Union.
The UK is more exposed than most with a housing market that has only started to slow in the last month, and debt that has continued to increase unabated.
There are counter-claims that the shortage of supply of homes in the UK will inevitably mean that house prices will continue to climb, even if the rate slows down in the medium term, but experts are beginning to say that this is no longer a realistic tenet. The reduction in interest rates has come to an end, and now they are all on the way back up. This may mean that the economy is more volatile, and could leave housing markets vulnerable to a worldwide correction.
Interest rates have reached their highest levels since 2001 for 30 members of the Organisation for Economic Cooperation and Development. Yields on government bonds are a key indicator for the cost of borrowing, and these have been seen to increase recently, sending shivers of concern through financial markets.
The US housing market’s fears have caught the headlines recently, but over-valuation is estimated to be more stretched in Britain, Australia, Spain and Ireland. Recently UK residential property has been calculated as being as much as 65% overvalued; in the US the same measure was estimated to be an overvaluation of 25%.
The next few days will produce a range of key indicators for the health of the British economy, including official the inflation figure. Although this is expected to fall from its May level of 2.8% – probably to around 2.5% – it is unlikely to fall enough to prevent another rise in base rates by the Bank of England in July or August.
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