Lack of housing leverage

Volumes at this time of year are thin as traders and fund managers have tidied up their books while they dust down the straw boater in anticipation of the months ahead. Much is constantly made of the lack of volatility at present; history has shown that the summer festive months have often been interrupted by moments of volatility, disturbing the family holiday. The lack of fear in the fear index (the Vix) is making investors wary as they fret over the calm before the next storm. As Bertie Wooster once noted, “Just when a fellow is feeling particularly braced with things in general that fate sneaks up behind him with a bit of lead piping”.

Who knows if the preverbal piece of lead piping is around the corner, and one must always be conscious that it might be. The FTSE 100 continues to lag most domestic advanced markets as our economy is considered to be the closest to raising interest rates.

Citi addressed the question as to how resilient the UK would be to rising rates. With interest rates at these historic lows one would expect the number of homeowners with a mortgage to increase. However, according to Citi research, the percentage of people who own a home with no mortgage is 30%, the highest it’s been in 30 years. Those that own a home with a mortgage have fallen from 45% in 1991 to just over 30% today. In 1981 over 40% of people rented that figure now stands at 35%. It rather appears that despite these very low interest rates, homeowners seem the most conservative for at least 30 years, at least with regard to mortgages in contrast to what you would believe from the press. It would also lead one to conclude the rise in house prices has not been completely created through leverage. Furthermore, according to Citi, the personal wealth-to-income ratio is at a record high.

All that data would suggest that UK residents are in a moderately good position to accept a rate hike.

As so much is made of volatility, or the lack of it currently, we noticed a chart courtesy of Barclays and Bloomberg that shows just how much it has fallen across all asset classes. The lack of asset price volatility is comparable to late 2006, hence the comments from some corners.