During the Brown bubble, most economic commentators spotted nothing – buying the theory that the West was adopting to a new era of permanently lower interest rates. Jeremy Warner and Jeff Randall stood out amongst a consensus which spied no danger. But a new generation of economic commentators are more sceptical. Allister Heath, an associate editor of The Spectator, has long had his eye on all this. And in today’s Times, Sam Fleming calls out Osborne’s housing bubble. His analysis is certain to annoy the Treasury, which wishes to present soaring property prices as part of a durable economic recovery.
There’s so much concern that the Bank of England’s new Financial Policy Committee is meeting on Wednesday to discuss fears about a new housing bubble. There is plenty troubling data to consider. The number of people employed in the property world is booming (right). Fleming’s piece highlights a sobering analysis by Smithers & Co which shows that the British housing market is three times more expensive than that of the US, measured by house prices-to-disposable incomes (below).
How did the US get it house(s) in order? Perhaps because the US let the bubble burst, and tolerated foreclosures aplenty – and is now enjoying a real, sustained and deserved recovery. The Bank of England broke the fall, and fed the debt addiction with the rock-bottom interest rates (and then more QE than America). It’s not clear that our bust did actually correct the malinvestments of the bubble years. House price values haven’t returned to pre-crash norms and there are an estimated 100,000 zombie firms still around.
How much of this is down to Osborne? He did not start the cheap debt policy, but gave it a new name (“monetary activism”) and in office he has introduced various debt-spreading devices. There was his new bonds, which lend to companies who can’t get cash from banks. Then his Funding-For-Lending scheme, designed to encourage banks to lend more to homebuyers. The side effect was dealing a hammer blow to savers by flooring Cash ISA rates: if banks could borrow from the government at knock-down rates, they didn’t need to pay more than 2pc to borrow from the public. Ironically, the BoE meets next week to decide whether to make it harder for banks to lend: precisely the opposite policy.
The Chancellor’s most recent debt drug is his increasingly controversial Help-to-Buy mortgage subsidies (dubbed ‘right to default’ by unkind souls). The consensus is that this adds froth to the market, pushing house prices further out of reach – but helping people load themselves up with debt. Savills estimates that this will jack up house prices by about £5,000. “Whether that’s a good thing or not depends on whether you own a home or you’re trying to buy one,” it says.
“The house price resurgence is increasingly divorced from income growth,” observes Fleming, ‘with headline [house] values measured by Nationwide rising at five times the pace of earnings’. It will ‘exacerbate the dangerous gulf in society between prosperous owners and the less fortunate’ who have no assets. He could have added that QE, explicitly intended to increase asset prices, further exacerbates this inequality. The richest, of course, own most assets. The Royal Institution of Chartered Surveyors is so concerned about another bubble bursting that it’s asking for the BoE to limit house price growth to 5 per cent a year.
That’s tricky, perhaps impossible, to implement. But what to do – especially given that Osborne will not admit to there being a problem? Politicians, of all political orientations, love house prices rising. It means that homeowners feel wealthier, and tend to borrow more against the value of their house, spending more on the streets. And feeling better-disposed towards whoever is in power. As Fleming says, the signs are that Britain is rekindling its love affair with property speculation – just five years after the last one ended in disaster.
Mark Carney, the new BoE Governor, has said he has tools to deal with this. Fleming suggests he seeks more: powers to impose caps on loan-to-value mortgages – regionally, if needs be. He also urges Osborne to cancel the proposed second phase of his Help-to-Buy mortgage subsidies. Both sound suggestions, and it’s good to see them in The Times.
UPDATE The below BBC report on Winchester house prices may be of interest.Tags: BubbleWatch, Funding for Lending, Help to Buy, UK Economy