Housing heat may lift rates

THE UK housing market seems impervious to the outside world. Shares are in the doldrums, the aftershocks of 11 September are running through the global economy and the oil price is climbing as the tinderbox of the Middle East grows ever more combustible.

None of this has perturbed the indefatigable British homebuyer, who is willing to do almost anything to get on - or up - the property ladder.

Admittedly, the latest Halifax figures do show a modest decline in the rate of increase in property values. Yet prices still rose by a whopping 16% in the year to March, and are up by 9% in the past five months. Figures from the Nationwide today also show double-digit growth.

Are homebuyers living in a fool's paradise? Property values have remained buoyant thanks mainly to low interest rates. According to economist Simon Rubinsohn at Gerrard, the typical mortgage repayment in London accounts for just 20% of earnings, compared with a long-term average of 27%. In the rest of the country, a home loan will only eat an average 14% of pay, compared to a typical 22% over the past 30 years. That has encouraged people to move into bigger and better properties.

Nice while it lasts. The worry, though, is that there is now a whole generation of homebuyers that views low borrowing costs as its birthright, and has not taken account of the impact of higher mortgage rates on the household budget.

In the short term, the Bank of England's interest rate-setting committee is unlikely to push through a steep hike.

Its decision for April, to be announced today, is a finely balanced one. An increase would moderate house prices and the consumer spending splurge.

But it would also hurt the manufacturing sector which, despite turning in its best performance for a year, is still weak. Rising oil prices, which will heap further costs on to industry, are another good reason to put a rate rise on hold.

Whatever today's outcome, most economists agree that the pressure on interest rates is now upward. And even a small rise could make quite a big difference to homebuyers. For example, an increase in rates from 4% to 4.5% equates to an additional 12.5% on mortgage costs.

The normally bullish housing economist John Wriglesworth of property research company Hometrack believes the Bank needs to increase rates by half a percentage point to nip the first signs of runaway house price inflation in the bud.

Gordon Brown could also knock homebuyers' confidence. The middle income, home-owning classes will be the hardest hit if, as widely expected, he pushes through an increase in employees' national insurance contributions in this month's Budget.

At the moment, barring some huge unforeseen economic shock, a housing crash still seems highly improbable. A gradual slowdown is more likely.

But the longer it takes for home values to come down to more normal levels, the higher the risk people are taking when they turn the key in the door of their new dream home.

Asbestos claims
CAPE, a company that mined asbestos in South Africa during the apartheid era, is delaying publication of its accounts until it has completed restructuring plans. The news passed virtually unnoticed.

Asbestosis is, however, an enormous issue. Sufferers of asbestos-related illnesses are now turning to the insurers for compensation. as many manufacturers have gone bust.

In the UK, Royal & SunAlliance had its profits razed to virtually nothing after being forced to set aside nearly £300m to cover asbestosis claims. Equitas, the company that handles old liability risks for Lloyd's of London, has increased its asbestos reserves by £1.7bn to just over £8bn.

Claims continue to rise as more genuine sufferers from deadly cancer mesothelioma and other diseases realise they can claim. Aggressive lawyers are also becoming adept at mounting more questionable cases.

The insurance and re-insurance industries are already reeling from the costs of 11 September. That will be dwarfed by asbestosis claims, now expected to total an enormous £145bn.

Luc out
MARKS & Spencer chairman and chief executive Luc Vandevelde says he is not ready to share his power with talented lieutenant Roger Holmes because the retailer's recovery is still in its early stages.

True enough. Let's hope, though, that he doesn't continue to flout best practice by keeping both jobs to himself for much longer.