No, house prices are not falling

It's just a summer blip.

Time to don youy hard hats, cancel this winters ski trip and think twice about the kids school fees, house prices have dropped by 1.8 per cent compared to July. The time for panic though may be a little premature however: what the newly released figures from Rightmove, a property website, have shown is no more than the annual summer blip. In fact since January house prices have continued to rise by 5.5 per cent, the fastest rate since 2006 and that’s £20,000 on January’s average house price of £230,000.

But is a rise in house prices really something to be happy about? Even if we dismiss the much publicised concerns over first time buyers (hard to do I know) the rise in prices may have greater worries for us all. One of the areas for concern is the ability to deal with inflation, as almost any rise in house price will mean higher levels of debt among households.

Even at just 2.8 per cent inflation is outstripping wage rises by 1.1 per cent month on month according to the office of national statistics. That’s a real terms wage cut of 1.1 per cent per month for everyone compared to the price of things like food. Conventional logic dictates that the Bank of England (BoE) cuts inflation back by raising interest rates when that happens, poverty not being a popular condition in a democracy.

But the Bank of England is doing the opposite. They hope that by keeping the lending rate at 0.5 per cent banks will lend more, and in turn we will spend more, boosting the economy. But after four years the BoE has not changed its policy despite banks stubbornly refusing to lend ro all but the safest bets. So maybe there’s another reason to keep rates low?

Maybe the answer lies in the fears of a collapsing housing bubble, a housing bubble so huge it can’t be inflated away.

Mortgage default levels have remained low despite rising unemployment and lower wages. This has been because the main affect of the crisis was that the BoE cut rates to record lows of just 0.5 per cent.  This helped the overleveraged homeowner from defaulting when living costs rose but their wages didn’t. The new rates gave them a cushion on which to land softly.

Any rise in the BoE rate though will pull away that cushion and the bump will be a hard one. Politically a hard bump is unacceptable. Voters could suddenly be homeless or struggling to pay debts. Any government in power when this happens can effectively say goodbye to any chance of a return to power, no matter how independent the BoE is supposed to be.

Therefore the pressure on the BoE to keep rates low and let house prices climb must be huge, if unspoken. The problem is that it’s a short sighted policy. Even if the average homeowner is not likely to default today or tomorrow because they can afford the low repayments, those repayments will inevitably be squeezed by other rapidly rising costs of living. Sooner or later there may not be enough money in the house-holders pockets to pay for all their outgoings including their mortgage. And by holding rates low, the BoE has no room for manoeuvre. Raise rates and be seen to cause a property crash, or keep rates low, increase our daily costs and cause a crash anyway.

They are caught between the devil and the deep blue sea.

So maybe it is time to don our hard hats and cancel that holiday. Not because house prices are falling, but because they’re not.

Photograph: Getty Images

Mike Cobb is a reporter at Private Banker International

Photo: Getty
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Are the Conservatives getting ready to learn to love the EEA?

You can see the shape of the deal that the right would accept. 

In an early morning address aimed half reassuring the markets and half at salvaging his own legacy, George Osborne set out the government’s stall.

The difficulty was that the two halves were hard to reconcile. Talk of “fixing the roof” and getting Britain’s finances in control, an established part of Treasury setpieces under Osborne, are usually merely wrong. With the prospect of further downgrades in Britain’s credit rating and thus its ability to borrow cheaply, the £1.6 trillion that Britain still owes and the country’s deficit in day-to-day spending, they acquired a fresh layer of black humour. It made for uneasy listening.

But more importantly, it offered further signs of what post-Brexit deal the Conservatives will attempt to strike. Boris Johnson, the frontrunner for the Conservative leadership, set out the deal he wants in his Telegraph column: British access to the single market, free movement of British workers within the European Union but border control for workers from the EU within Britain.

There is no chance of that deal – in fact, reading Johnson’s Telegraph column called to mind the exasperated response that Arsene Wenger, manager of Arsenal and a supporter of a Remain vote, gave upon hearing that one of his players wanted to move to Real Madrid: “It's like you wanting to marry Miss World and she doesn't want you, what can I do about it? I can try to help you, but if she does not want to marry you what can I do?”

But Osborne, who has yet to rule out a bid for the top job and confirmed his intention to serve in the post-Cameron government, hinted at the deal that seems most likely – or, at least, the most optimistic: one that keeps Britain in the single market and therefore protects Britain’s financial services and manufacturing sectors.

For the Conservatives, you can see how such a deal might not prove electorally disastrous – it would allow them to maintain the idea with its own voters that they had voted for greater “sovereignty” while maintaining their easy continental holidays, au pairs and access to the Erasmus scheme.  They might be able to secure a few votes from relieved supporters of Remain who backed the Liberal Democrats or Labour at the last election – but, in any case, you can see how a deal of that kind would be sellable to their coalition of the vote. For Johnson, further disillusionment and anger among the voters of Sunderland, Hull and so on are a price that a Tory government can happily pay – and indeed, has, during both of the Conservatives’ recent long stays in government from 1951 to 1964 and from 1979 to 1997.

It feels unlikely that it will be a price that those Labour voters who backed a Leave vote – or the ethnic and social minorities that may take the blame – can happily pay.  

Stephen Bush is special correspondent at the New Statesman. He usually writes about politics.