As annual house price growth rises to 9.7 per cent, should the Bank of England hike rates to rein in housing costs?

Report Warns Average Deposit For First Time Buyers In London To Rise To Over 100,000 GBP By 2020
Source: Getty

Andrew Sentance, senior economic adviser to PwC and a former member of the Bank of England’s Monetary Policy Committee, says Yes.

High house price inflation is one sign of the financial imbalances which are building up in the UK economy on the back of very low interest rates, which also risk fuelling a new wave of consumer borrowing. The Bank of England should have started to adjust interest rates upwards at least a year ago, and if that had happened housing would now be more affordable for young people, particularly here in London and the South East. Though mortgage costs might have been slightly higher, the level of house prices would have been lower. The problem we now face is that a new generation of borrowers is gearing up on the basis of low interest rates and when interest rates do eventually rise there will be more financial distress. If I were still on the MPC, I would be trying to move interest rates up gradually to around 2 per cent. Unfortunately, the Bank of England has turned its back on that strategy, and high house price inflation is one of the consequences.

Tristan Chapple, research director at Phoenix Asset Management, says No.

In the long run, house prices are determined by supply and demand, not interest rates. Prices are high because the UK builds 140,000 houses per year when it needs 250,000. There is a housing shortage in this country. Raising interest rates does nothing to address this. For proof of that, look what happened to US house prices in the 2008-09 downturn: areas like Detroit had too many houses and saw 70 per cent plus price declines. Areas like New York saw far smaller price falls because there was no supply surplus. Crucially, both these areas had the same interest rate, set nationally. The huge difference in prices cannot be explained by interest rates. Coming back to the UK, we must do everything we can to build more houses. The government recognises this and is helping stimulate supply by reforming the complex UK planning system and helping aspiring homeowners onto the housing ladder with their Help to Buy scheme.

City A.M.'s opinion pages are a place for thought-provoking views and debate. These views are not necessarily shared by City A.M.

Related articles