I live outside a small market town in East Anglia. A week or so ago, the headlines in our local newspaper heralded the fact that house prices had risen faster in our area than anywhere else in the region, bar Cambridge. Should there be any surprise in market towns delivering above-average rises?
Strictly speaking, house prices do not feature in the long list of statistics over which the monetary policy committee was deliberating last week. However, it would be naive to think it does not take them into account when reaching its decision. As it happens, there were plenty of other statistics to steer it towards a rate rise. Inflation is above target, economic growth above trend and there is little sign that much spare capacity exists in UK plc. The move to 5 per cent was a foregone conclusion.
Will dearer money make any difference to the seemingly unstoppable residential property market? Despite a leading firm of accountants coming out with a report that concludes there is a 33 per cent change of a house price crash within three years, it is hard to see prices doing anything other than moderate in the rate they advance. We have a shortage of suitable housing in this country. Aside from demographic changes altering the nature of the homes in which people want to live, immigration and second-home purchases are driving demand. It would take a sharp downturn in economic activity or double-digit interest rates to bring the market to its knees. Neither looks on the cards, thank heavens.
In any event, monetary tightening is a worldwide phenomenon. India and China have both raised rates and markets have been discounting this trend. US treasuries took a hit as fresh data and revisions of previously published figures pointed to a more robust economic picture. The spectre of further Fed rate increases returned but this has done little to upset equity markets. Investor optimism has come back and volatility has subsided.
Looking off piste, so to speak, investing in infrastructure is gaining support. Given that swathes of continental Europe found themselves without electricity last week as the first seriously cold snap of the autumn drove up demand, there would appear to be plenty on which to spend money in this area. Gold is also enjoying a resurgence of interest, with a number of bullion houses forecasting a move into new high ground next year.
Perhaps the knowledge that governments and central banks now have a common goal of sustainable economic expansion coupled with low inflation really has changed the investment landscape. It is more likely that a false sense of security has been delivered by a swift recovery in markets from last spring’s shake-out and the fall in volatility.
Make no mistake, the higher that markets travel, the more likely we are to see turbulent times for shares. I am not taking too many profits yet, but I am being more critical over what I am prepared to keep in my portfolio. Perhaps I need to add a house in my local market town to my assets.
Brian Tora is principal of the Tora Partnership