Value falls for home buyers

Interest rates are rising around the world as a response to the threat of inflation that is resulting from increasing oil and commodity prices. US interest rates have increased from 1 percent to 5.25 percent over the last 2 years, yesterday the Bank of England increased interest rates to 4.75 percent and eurozone interest rates increased by 0.25 percent to 3 percent. Even Japan, which has had near-zero interest rates, made its first increase in rates in six years last month. In Greece, as in much of the developed world, the availability of cheap debt has fuelled borrowing in the form of credit cards, personal loans and mortgages. This has in turn driven consumer spending and house price inflation. Although eurozone interest rates are still very low by historical levels, they have increased from 2 percent to 3 percent over the last 8 months, a 50 percent increase. When eurozone interest rates were 2 percent, variable-rate «interest-only» mortgages were available with rates of 3.5 percent. These mortgage rates will now be 4.5 percent. For example, a 250,000-euro apartment could have been purchased 12 months ago with a 30,000-euro deposit and monthly interest-only mortgage payment of 640 euros. Monthly interest payments will now be 825 euros. This could significantly impact disposable incomes, especially when combined with increased debt costs on personal loans, car loans and credit cards. It will also impact the affordability of residential property. Typically residential purchasers assess what they can afford on the basis of monthly repayments. Reversing the example, a person with a budget of 640 euros per month and a deposit of 30,000 euros can now only afford a property worth 200,000 euros with an interest-only mortgage. Increases in interest rates also have implications for investors who have purchased residential property to rent out. As residential yields in Greece are around 4 percent, the rental income will not even cover the interest payments on an interest-only mortgage. The maintenance costs, vacancies and capital repayments must be covered by the investor. For the residential market, lower affordability and poor investment returns are offset by a generally strong economic environment, and positive market sentiment. As a large proportion of total residential property stock is owned without mortgages, the market is also more resistant to higher interest rates. So although house price inflation will slow it is unlikely that prices will fall in the short term. However, global inflation is on the increase and there may be the need for further increase in interest rates. Interest rates of 4 percent would still be low by historical levels but could push some homeowners towards default. Greece has the highest growth in mortgage debt in the eurozone (30 percent in 2005) but mortgage debt is still a relatively new concept in Greece. In the words of Warren Buffet: «When you combine ignorance with leverage you can get some pretty interesting results.» James Ward is a chartered surveyor with Lambert Smith Hampton (Hellas) SA.

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