In terms of politics, economics and financial markets, we are currently living through extremely uncertain times. The political and human impact of September 11th has been awful, but the economic impact has also been quite dramatic.
For mortgage holders and those considering dipping a toe in the water the messages are mixed. Global economic activity was already under pressure prior to the attacks on September 11th but the risks have increased significantly in the aftermath of the attacks.
The US economy looks certain to head into negative growth territory over the coming months, and European growth will also continue to slacken, although it should avoid recession. As a textbook example of a small open economy where exports account for over 110 per cent of GNP, it is inevitable that the Irish economy will suffer.
Nowhere has the slowdown in growth been more evident than in the housing market. Auctions throughout the summer were showing an increasing number of houses being withdrawn. This trend is likely to continue. Business and consumer confidence is facing into a rough six months, with increased job insecurity and lower levels of activity.
For the housing market this represents a difficult environment. Many potential purchasers are standing back in the expectation that prices will be lower next year and of course this sort of behaviour tends to become self-fulfilling.
Anecdotal evidence supports the recent reports suggesting that house prices have started to fall back in the second half of this year and this trend is likely to become more pronounced in the first half of 2002. Of course, the price declines are not likely to be uniformly spread across the markets. Houses at the higher end of the market could see prices fall by up to 15 per cent next year, while continued strong demand for starter homes should ensure that the price declines will be more tame.
For anybody considering buying a house, the obvious temptation is to wait six months or so, which makes intuitive sense. However, the danger in that strategy is that we could see a flux of buyers coming into the market together later in 2002. The most sensible strategy is probably to keep a close eye on the market over the coming months, as some good value will inevitably present itself. It promises to be a buyers' market for the foreseeable future.
The European Central Bank left interest rates unchanged last Thursday, which was not unexpected. However, there is still good news in store for mortgage holders as it is still a question of when, rather than whether, the ECB delivers the next cut. Within three months we could well see another 0.75 per cent off interest rates.
That would represent quite a bonanza for mortgage holders, but the bonanza should be enjoyed while it lasts.
Current and prospective interest rates are exceptional and are intended to deal with exceptional circumstances. Once the global economic cycle starts to pick up in the second half of 2002, we should see rates moving back towards more normal levels. Assuming ECB rates do fall to 3 per cent before the end of this year, we could be looking at the possibility of rates back up at around 4 per cent by the end of 2002. Such a forecast has of course to be accompanied by a degree of caution, given the current political situation.
Jim Power is director of investment strategy, Friends First Asset Management
