New fears house bubble may undermine recovery

Tim Wallace
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PLANS to pump up the housing market could undo the UK’s progress towards sustained economic growth, economists warned yesterday after the chancellor welcomed the recovery.

George Osborne yesterday said the return to growth vindicated his decisions to stick with the deficit reduction plans, and insisted he is working to improve living standards.

Analysts praised the corporate tax cuts and moves to restrain public spending and borrowing, arguing the policies had help the UK recover.

But they also fear that good work could be undone if policies like the Help to Buy mortgage guarantee scheme combined with super-low interest rates cause a dangerous boom and bust in the housing market.

“The chancellor played up the benefits to housing supply from his scheme in his speech today, quoting a forecast that house-building will rise 30 per cent by 2015. But that rise would be well short of what would be needed to keep house prices under control,” said Berenberg Bank economist Rob Wood, who expects prices to rise 15 per cent through this year and 2014.

“The unfortunate position in the UK is that housing supply is less responsive to conditions than housing demand, which is how house prices rose so much before 2007. So we see upside risks to our house price forecast.”

And business groups called for more support for investment and exports to make sure the recovery is balanced across all sectors of the economy.

“To deliver a sustainable recovery we need stronger levels of business investment and trade to rebalance the economy, so we must get behind smaller firms who are ambitious to export,” said John Cridland from the Confederation of British Industry.

“We have always said that deficit reduction should be at the top of the Government’s to-do list, but it must be coupled with an unrelenting focus on growth-boosting measures like infrastructure projects.”