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A Consumer&#39s View

Have interest rates peaked? The experts do not agree but it looks

increasingly as though the housing market is cooling – as the Government

hoped – that borrowing is declining and consumer spending is falling off.

What does this mean for investors? The most obvious reaction is that bond

prices will rise in expectation of yields declining. Moreover, investors,

exhausted after the turmoil in stockmarkets, will be glad to park their

money in something safe, go off to the beach and forget about investment –

at least for a while.

Even bulls of technology stocks such as stockbroker Paul Kavanagh at

Killik & Co have been heard to say it might be the time to get

some exposure to good-yielding income and growth stocks or even sit on


More often than not, it pays to apply some common sense. Look at the real

figures on net lending from the Bank of England rather than the seasonally

adjusted ones. Net lending by the banks, unseasonally adjusted, has fallen

from £5.3bn last November to £2.6bn in February, the latest month when

real figures are available.

It would appear that either debt aversion is taking over or earnings are

rising faster than the official figures reveal, leaving employees with more

disposable income, which would also account for the fall in net lending.

A similar picture emerges if we look at the unseasonally adjusted figures

for notes and coins in circulation, down from +£2.7bn last December to

-£1,6bn in February.

Many individuals used borrowed money to jump on the high-tech stocks

bandwagon just before Christmas and in the New Year and if they did not

sell out before March 10, when the Nasdaq hit its all-time high, many were

in trouble.

Investment adviser Michael Kauders says: “Deflationary debt service costs

predominate. Vanishing money is the real issue. It causes share prices to

fall and Government security prices to rise. Once it gets a grip, those who

are overborrowed turn into forced sellers, accentuating the falls and

reinforcing that vanishing money trick.”

So you can expect a rocky ride in equity markets this summer. All of which

is bad news if you were foolish enough to borrow to pile into tech stocks

but is definitely good news for homebuyers and those in need of income.

Latest figures from Autif reveal once again that investors have got their

timing wrong.

They were piling into corporate bond funds in July, August and September

last year at a time when interest rates had clearly bottomed out.

They settled at 5 per cent in June 1999 and have predictably risen ever

since, thereby guaranteeing these investors a capital loss on their bond

funds. In all three months, corporate bond funds were one of the top-

selling sectors.

Now, when arguably interest rates have peaked, what are investors doing?

They are not buying either corporate bond funds or equity income funds –

these are among the worst-selling sectors of the market. Instead, they are

still piling into specialist funds and to some extent UK growth funds.

Homebuyers seem just as confused about interest rates. What emerges from

the latest Council of Mortgage Lenders&#39 research is that perceptions about

interest rates are relative. Factors which encouraged house purchase and

mortgage borrowing among both existing owner-occup-iers and first-time

buyers included rising disposable income, falling unemployment, better job

prospects and attractive finance deals produced by competitive mortgage


All these factors are entirely understandable. But rising house prices

were cited asa reason for buying.

While nobody wants to buy a property which will fall in value, it sounds

suspiciously as though homebuyers are tempted into the market at the wrong

time by greed and fear.

The CML report says this was balanced by a perceived need for caution

because of rising interest rates.

Very sensible but, with fixed and capped rates now widely available, this

should not act as a deterrent unless borrowers cannot afford the repayments

in the first place.

Admittedly, now is not the best time to be buying because the market,

particularly in London and the South-east, has probably peaked.

But neither is it the worst if interest rates are, as expected, coming down.

Meanwhile, Abbey National&#39s research reveals that renting a property costs

on average 42 per cent more than buying a home over a 25-year period.

Buying rather than renting a two-bedroom flat saves an average of 56 per


The Royal Institution of Chartered Surveyors says the housing market in

London and the South-east shows signs of cooling, which could mean that,

with falling inter-est rates, there will be some buying opportunities for

the bold investor.

Finally, if you believe the euro cannot fall any further without losing

all credibility, a move into Europe now could be a good play.

Even if the long awaited restructuring of Continental economies takes

time, the relative strength of the pound and the possibility of interest

rate rises in Europe mean you are buying at the right time in the economic



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