ALEX BRUMMER: Don’t talk Britain into a housing crisis

The gloomsters are back on trend. 

Having worried us that rising energy prices and inflation will condemn everyone to shopping in food banks, they now predict that higher interest rates, as consumers come off fixed rate mortgage deals, will soon have the keys piling up on estate agents desks. The dream of home ownership destroyed.

Yes, interest rates continue to rise. Last night’s three-quarter of a percentage point increase in America’s key federal funds rate to a range of 3.75 per cent to 4 per cent means that US borrowing costs have now jumped by 3.75 percentage points since Fed chairman Jerome Powell, a Trump appointment rolled over by President Biden, joined the battle designed to prevent double digit inflation from becoming embedded.

On the basis that the Fed’s boldness will lead the Bank of England to abandon timidity, it will travel the same distance today, from 2.25 per cent to 3 per cent.

The trend towards higher rates looks locked in.

But how worried should people with mortgages be? If they believed it was possible for near free money post-financial crisis and Covid-19 interest rates to persist, they were living in cloud cuckoo land. It is worth remembering that, after the financial crisis, lenders were required to change their approach to home loans.

Instead of basing mortgages on multiples of gross income, an array of credit checks were imposed, including post-tax spending patterns on everything from gym membership to foreign holidays.

In the immediate aftermath of Trussonomics there was a moment of great stress as long-term gilt yields – the basis of which many fixed rate mortgages are priced – and fixed rate deals rose above 6 per cent.

But that should be an aberration. Lenders panicked by raising mortgage rates to eye-watering levels. It is an unfashionable view but interest rates may soon be peaking. The Bank of Canada, early off the mark, is calling a peak. The worst of the Federal Reserve’s rate rises are behind it.

In the UK the efforts to close the purported budget black hole, ranging from £35bn to £60billion, already have brought gilt yields tumbling down.

The yield gap with German bunds – the benchmark in Europe – has closed.

When the Bank of England embarked on its quantitative tightening this week, selling gilts, there was a mad rush with more than £2billion of bids submitted.

That knocks on the head the idea that the UK is dependent on the kindness of strangers.

The UK’s debt to GDP ratio is lower than many of our competitors and the scare of unfunded tax cuts laid to rest.

The question now is how high will rates go? Expectations are heading down and the 5-6 per cent range for official rates is off the table.

Owning your own home is going to become more expensive if people happen to be among the 1.8m borrowers who come off their fix in the next year when rates will peak.

That means that there are as many as 7m or so borrowers who will be able to sit out the highest rates.

The days of cheapo home loans are over and the residential price bubble may burst (no bad thing for first-time buyers). It is premature to talk ourselves into a housing crisis alongside the cost of living crunch.

Lone Stars

When my son Justin and his wife Ruvani de Silva (an award winning drinks writer), who live in Austin, joined us on holiday in Europe in August they brought with them a bottle of Lineage, a Texas single malt.

I was sceptical but on tasting thought it excellent.

So when discussing Diageo’s most recent financial results with chief executive Ivan Menezes I mentioned my Texas single malt but couldn’t recall the name.

He immediately responded with the name of the craft whisky maker Balcones, based in Waco and founded in 2008.

The second shoe has now dropped. Adding to its portfolio of US craft liquors, Diageo has bought Balcones Distilling (for an undisclosed price), declaring how impressed it is with the innovation and pioneering spirit seen in its main brands Lineage American Single Malt and Baby Blue Corn Whisky.

Scotland has the purest mineral waters but Texas has the intense heat which enhances the flavours.

Yee-haw.