COMMENT
All Change For 2005!

By Cliff D'Arcy
December 22, 2004

One thing that makes me laugh is the spurious financial predictions made by so-called experts, usually highly educated and plausible economists.

My belief is that most large-scale financial systems are so complex and chaotic that it is simply not possible to make even the most basic predictions about future trends. I'm willing to bet that most economists' records of predicting the future are no better than that of a monkey throwing darts at a board divided in two with "Will go up" and "Will go down" written on it!

Take, for example, predicting house prices. In 2001, the UK's biggest mortgage lender, HBOS, predicted that UK house prices would rise by an average of 5% in 2002. Being the owner of around 2½ million homes, you'd think that HBOS would be able to call the housing market with some degree of accuracy, wouldn't you? Sadly, you'd be wrong, because the actual average increase in house prices was almost 25%. In other words, HBOS was out by a factor of five!

Hence, when commentators start telling the future, I tend to go to sleep! However, here are four predictions that I'm going to make for 2005.

1. House prices will change

One thing that economists learn is, "today's conditions will not persist forever". In other words, when it comes to house prices, I'm expecting them to end 2005 at a different level from when they started. However, I haven't the faintest idea whether they will fall all year, fall then rise, rise then level off, or any combination of rising, falling and levelling off. The only guess that I'm willing to make is that they'll be different.

However, whatever happens to house prices, it's always a good idea to make some effort to reduce the cost of your mortgage or try to pay it off faster. Learn more in Five Ways To Perk Up Your Mortgage.

Find a happier home loan in our Mortgage centre.

2. Mortgage rates will change

Most mortgage borrowers in the UK have variable-rate loans - the obvious exception is homeowners with fixed-rate deals. When the Bank of England changes its base rate, mortgage lenders react by raising their variable rates, too. Often, they add a little extra on for luck, and to boost their profits, as we revealed in The Mortgage Lenders' Sneaky Sting!

My second prediction is that the Bank will change its base rate at some point during 2005. This data (Excel file) shows that the base rate has changed at some point in every year since 1970. The only exception was 2002, when it remained at 4% throughout the year. Incredibly, the Bank changed its base rate thirty-six times in 1982, or more than once a fortnight. Crikey!

So, it's normal for the base rate – and, therefore, mortgage rates – to go up and down. If you can't cope with this rollercoaster, consider getting a fixed-rate mortgage. At least with a fix, you can predict your monthly repayments for a defined period of time, say, five years.

3. Savings rates will change

Savers had a good year in 2004, as base-rate hikes pushed up savings rates on Best Buy accounts by around one percentage point. Unsurprisingly, banks tend to fiddle with their savings rates when the Bank of England changes its base rate. And, as we've learned, the base rate likes to wiggle about now and then. Thus, I expect savings rates to go up or down during the course of 2005. I won't say when or by how much or in what direction, but I expect them to vary.

However, regardless of what happens to the base rate and savings rates, today is always a good time to find a superior savings account. Why leave your money rotting in a second-rate savings account, when you can earn annual interest of 5%+ in a Best Buy savings account? What's more, a tax-free cash mini-ISA allows you to keep the taxman's hands off your interest, which boosts your returns handsomely.

Check out the delightful accounts in our Savings and Cash Mini-ISA centres.

4. Share prices will change

As this article explains, it's normal for the UK stock market to be volatile. In the fifty-eight years since 1945, the FTSE All-Share Index (which tracks the value of around seven hundred UK companies) has gone up or down by more than 5% on forty-eight occasions. In other words, it's only moved up or down by 5% or less on ten occasions, or about one year in six.

With history on my side, my stock-market prediction is that the market will go up or down by more than 5%. On second thoughts, I'll hedge my bets by saving that the FTSE will go up and down throughout the year, but will end at a different level to the closing level on the last day of 2004. That's a truly safe bet!

However, I'm not terribly bothered what happens to share prices next year, as I've no intention of selling any of my shares. Next year, I plan to do exactly what I did this year, which is to invest money into a cheap, simple, flexible index tracker every month, in order to smooth out the ups and downs. I'll also put lump sums into carefully chosen companies, with the aim of holding these for the long term. All in all, I'm looking forward to being a lazy investor in 2005!

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Cliff owns shares in HBOS.