Quantitative Easing

HAMISH MCRAE: We’ll pay for soaring house prices

HAMISH MCRAE: House prices can’t stay at eight times earnings, but bringing that ratio to a sustainable level will be a bumpy race

The Bank of England is worried about soaring house prices, and about the weather too. Prices in April rose 10.9% from a year ago, the biggest increase since the 2008 financial crisis.

And last week Sir Jon Cunliffe and Sir Dave Ramsden – vice governors for financial stability, and markets and banks respectively – issued warnings.

Sir Jon believed the increases were mainly due to the stamp duty exemption, but warned of “housing choices that could affect the future”. Sir Dave warned of the risk that “demand exceeds supply” and push up inflation.

Soaring: At the end of last year, house prices were more than eight times higher than average incomes, the highest in 120 years.

Indeed. Take another statistic. At the end of last year, house prices were more than eight times higher than average incomes. This is the highest for 120 years.

Homes in Britain are less affordable than they’ve ever been since 1900. Fund manager Schroders did a shrewd study of the relationship dating back to 1845. They spotted that those eighties. Once was around 1900, the next just before the 2008 financial crash – and now.

This boom in house prices is not just a British phenomenon. He’s a world. Prices in some other countries may be lower relative to incomes, but they are skyrocketing.

According to Knight Frank, at the end of March they were up 22.1 percent in New Zealand, 16.6 percent in Luxembourg, 13.2 percent in the United States, 13 percent in Sweden, 10.8 percent in Canada. the list gives.

Why are prices soaring around the world? The answer is simple. Central banks have kept interest rates ridiculously low, making borrowing historically cheap. And with quantitative easing, they have indeed printed almost limitless money. This money has to go somewhere. They triggered an asset price boom. Inexperienced investors have bought all kinds of fluffy things like Bitcoin.

The wiser have bought houses on the grounds that while prices may indeed drop a little – most of us remember what happened in 2008 – at least they will have a place to live.

The housing boom has been great for people who already own a home they are happy with. It’s nice to feel a little richer. Median household wealth was £ 286,600 in 2016-18, according to the latest figures from the Office for National Statistics. My quick tally, taking into account the rise in house prices since then, would put wealth now well above £ 300,000.

It might be good for families who can help their children in their first home, but socially it’s a disaster. Democracies cannot tolerate a situation where young people cannot afford to buy a house if they do not have the family money to start.

The big puzzle is not what happened, but why. Why have central banks, and governments too, let this boom take off?

First, most central bankers and politicians are too young to remember the 1960s, when inflation gradually rose but didn’t seem like a serious problem until it exploded in the 1970s.

Throughout their working lives, the long-term trend for inflation has been downward. Then they were conditioned by the target inflation regime – introduced in the 1980s to help get the ball rolling – to think that if current inflation remained low, they could jumpstart their economies by loosening credit.

Asset inflation didn’t matter; it was not in their mandate. Third, when the banks got into the lending madness that led to the 2008 crash, everyone blamed the banks and put all kinds of checks on them. But if the banks couldn’t lend, how was the economy going to recover?

Thus, the authorities also launched ultra-easy monetary policies with low interest rates which ultimately led to decent economic growth. It also lowered the cost of borrowing for governments that had seen their deficits soar. The policies worked.

So last year, faced with another crisis beyond anyone’s experience, they used these policies again. But they exaggerated – hence the rush for real assets around the world, including homes in Britain.

The result? Interest rates will have to rise and current inflation will rise. House prices may have to come down a bit and wages will certainly have to go up.

House prices cannot stay at eight times income. But getting that ratio down to a sustainable level will be a bumpy ride.

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