Interest rates will rise in 2003, but the overheating housing market is going to moderate rather than crash, according to the latest Fundamentals Briefing from Legal & General (L&G).
Commenting on the UK economy and its relation to the housing market, Andrew Clare, financial economist at L&G Investment Management, said that while the FTSE 100 index has fallen again for the third consecutive year, in some ways the economy is being propped up by the performance of the housing market.
‘The problems with the FTSE index have led to a desire to move from equities to fixed income. Despite what is written in the press most people with money to invest do not think about moving into property instead. Private ownership of shares is low in the UK, so it is less of an issue than in the US.’
Clare added: ‘If the UK econ-omy is viewed as a wheel, then the housing market is definitely the hub. This was not the case in the early 1990s when the weak housing market did not help the economic performance of the UK. But now, I would say two-thirds of total expenditure in the economy is on housing.’
Despite the Monetary Policy Committee’s recent decisions, Clare predicted it would put interest rates up next year.
However, a soft landing is predicted as mortgages are as affordable as they have ever been, and the economy is more robust than during the last crash.
Clare said: ‘The key is affordability and people will just gradually drop out of the pool of new home purchasers. The moderation process has already begun.
‘We are already seeing a fall in house prices in central London, which should gradually ripple out through the rest of the market.’