Author: by Stephen Hill
Are we in a housing bubble? Answer: no, not yet. Mortgage affordability – the percentage of income spent on repayments – is below the long-term historical average, while earnings and employment are rising as well.
The chancellor’s injections, however, of Olympian steroids into the arm of the housing market – up to £200 billion through Funding for Lending, mortgage guarantees and Help-to-Buy – are doing their job: house prices up 9.5 per cent last year across the UK, and 18 per cent in London, according to Nationwide.
And the Conservatives are now at level-pegging again with Old Labour in the polls. Much more of this and houses will be back as your personal ATM once again. This chancellor is, of course, the first to be both chancellor and the head of his party’s re-election campaign.
He spent two years head-hunting Mark Carney as governor of the Bank of England, and it is inconceivable that monetary policy (QE and interest rates) in the run-up to May 2015 were not discussed and basically agreed upon. The chancellor is likely to be the first again to deliver a pre-election boom while borrowing around £80 billion at the same time.
Hmm. Something doesn’t quite add up here. The error, or difference, is in the artificially low base interest rate of 0.5 per cent for the past five years, driven 1 per cent below the current EU CPI-measured inflation, by a mixture of recession, QE and the size of government debt. And CPI conveniently does not take into account the cost of housing, namely mortgage interest rates. This market will last for another year, but then what?
The fact is the BoE should be raising interest rates now as the economic recovery in the UK is now established, with unemployment dropping and output and exports up, along with UK RPI-measured inflation, which does include the cost of housing.
The governor is finding himself getting into an offside position of being behind the real interest rate curve, which is exactly where a central banker shouldn’t ever be: he should be ordering the waiters to start removing the punch bowl now but cannot, because the Chancellor is bathing in it and his prize is in sight – re-election.
Hold it a minute: isn’t this where the Global Crunch of 2009-2014 started, when the Fed kept interest rates far too low from 2006-2009? And then at 0.25 per cent for the next five years, and now again as the economy recovers? Talk of a Perfect Parabola of Central Bank Failure. And what will mortgage rates be within a year of the 2015 election? How about 6 per cent, 7 per cent, 8 per cent… on a 100 per cent guaranteed/borrowed Osborne mortgage?
I detect a housing bubble building bubble now which will explode in 2016-18. You can read it in the figures; let’s hope over-borrowed mortgagors can see it too.