House prices are falling and its official. Of the house price figures released, the Halifax house price index tends to be more relevant for northern homes.

Prices fell last month by 0.6 per cent. The average house price is now £160,565, down from £161,831 in July. The rate of growth has been slowing in recent months, and the fall confirms rumours that buyers are thin on the ground for properties at current values.

The implication of this is that property is no longer being seen as the investment of choice to provide above average returns.

This all comes at a time when the stock market has returned to favour. While dividend income from shares cannot quite match property rental income returns, the risk of falling values in both types of investment is now being closely scrutinised. The purchase of shares tends not to be geared, in that money is not borrowed at one rate and invested at another. With property, gearing plays a large part, and if the returns no longer match the costs of borrowing, the extent of any loss is exaggerated.

The stock market looked to be seriously in the doldrums after a poor July. Friday, August 13 proved to be a turning point for the FTSE 100 at 4301.5. Since then, the market has increased by more than five per cent, and this figure is before taking into account dividend income payments.

To put the importance of income from an investment into context, it is worth considering historical returns. If £100 was invested in 1945, inflation would mean that the sum would need to grow to £2,502 to effectively not lose value. A building society would have returned only £1,606. Investment in equities with the dividend income withdrawn and spent would have returned £5,716. Property over the period would have returned £10,000. The big returns, however, have been seen to be from investing in equities, with dividend income reinvested, turning £100 into £78,643.

Interest rates will be the major feature for this week. As we know, the cost of borrowing affects the profitability of any investment. Equity purchases involve sharing in the current and future profitability of companies. The Bank of England's monetary policy committee meets on Wednesday and Thursday to decide on interest rates. Earlier in the year, it was seen as a foregone conclusion that rates would continue to be increased. Now, that no longer appears to be the case. Inflation remains well within its target band, and now that the froth at the top of the property market has been blown off, there remains little reason for any further interest rate increase. The market consensus is for rates to remain unchanged.

The best indicator to the future trend of equity markets is the bond market. Bond investors are in a quandary as to how to position themselves in the market at the moment. As mentioned earlier, with interest rates previously having been expected to rise sharply, the smart money has been at the shorter end of the market, ie bonds with a relatively short maturity date. If interest rates are not to increase, then the better value is available from the longer end of the market.

The phrase safe as houses is now being questioned, and while nobody is quite predicting a property crash as seen in the early 1990s, it is always wise to be aware.

Published: 07/09/2004