Great Titchfield Street, London -- Over the past few days many Wise pundits have attributed the New Year plunges in the major stock market indices around the world to worries that interest rates might have to rise to combat the fear of rising inflation. This old chestnut is the most popular one to wheel out whenever share prices tumble. Investors are reckoned to get better returns from leaving the money in the bank to enjoy the higher rates of interest, therefore causing a slight sell off in the stock market. However conflicting economic figures suggest the situation is more complex.
Today those who favour this argument were given more fuel to fan their inflationary flames. According to the Halifax (LSE: HFX) house prices rose by 2.6% in December, when compared with the previous month. This means that for the whole of last year the country's largest mortgage lender reckons house prices improved by 13.6%. That is the highest rise for ten years since the extraordinary leaps property prices saw in the late 1980s. This would seem to be the case. The Nationwide building society also reckons a 13.3% rise last year took place. An average UK house now costs a shade over £83,000.
All this suggests that last year you would have done just as well by leaving your money installed in your bricks and mortars at home. However, it is easy to forget that the FTSE 100 rose by an impressive 17.8% over the whole of last year. A pity though that the index has since fallen 5.8% so far this year, wiping out the lead equities enjoyed over property last year. What these comparisons might suggest though is that the economy is far from overheating. Instead of there being a bubble in share prices, it seems that the real bubble is in the housing market.
Another headline today suggests US house sales on the other hand are falling. A survey conducted by Bloomberg, the news provider, says sales dropped 5.7% in November. Mortgage rates have risen more quickly in the US over the last year than in the UK, where the Bank of England's base rate is still half a percentage point less at 5.5% than it was last January. Because of this the Halifax still thinks house prices will pick up by 8% this year as well.
On our small crowded island ("set in a silver sea…") demand for property remains fierce. An Englishman's home still remains his castle. An American's castle is however probably now his stock portfolio! One hopes though that UK equities manage to beat this 8% rise forecast for house prices. That would leave the FTSE 100 at just short of 7500 by the end of the year: not too dramatic I'm sure you'll agree.
Eddie George's next interest rate move will be decided on January 13th.
Whilst rising house prices might make Eddie and co hike interest rates, evidence elsewhere suggests retail prices are still under attack. A steady stream of Christmas trading statements continue to engulf investors. Cut-price on-line retailer Amazon.com (Nasdaq: AMZN) yesterday said sales in its fourth quarter, covering the Holiday season, shot up over 150% to $650m. This was still less than many forecasts thought they would be and the stock fell 15%. Perhaps news that losses increased as well is what put investors off. Lower margins look like something retailers are going to have to learn to live with. A report by Verdict, the retail consultant suggests this gloomy scenario for retailers.
On this sides of the Atlantic leading UK internet access provider Freeserve (LSE: FRE) released second quarter figures. The group said the number of new users remains steady at 14,000 a week. Over 1.675m people now use the service apparently. Turnover improved 12% to £3.779m and losses before exceptional items fell 28% to £5m. These figures will be dissected in today's Fool's Eye View. In early trading the shares ticked up 21.25p, or 4.3%, to 510p
Motor car dealer Inchcape (LSE: INCH) attempted to kickstart its e-commerce operation via an interesting acquisition. This sent the stock up 34p, or 12.3%, to 310p.
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