It is starting to look as if George Osborne is going to blow another housing bubble, albeit this time of a more modest variety. His Funding for Lending Scheme is starting to have an effect; but instead of making it easier and cheaper for small firms to borrow money, the subsidy’s supposed intention, the scheme is merely channelling funds into the housing market.
Yet house prices remain over-valued nationally, probably by about 25 per cent. They still need to fall – and eventually will, in real terms at least. Delaying this adjustment will only make the eventual correction even more painful, while hurting the prospects of those who cannot get onto the housing ladder or are stuck in excessively small homes.
But reflating the bubble could temporarily make the economy feel better than it really is. Research by Robert J. Shiller, who made his name warning of irrational exuberance, and his colleagues Karl E. Case and John M. Quigley, published by the National Bureau of Economic Research, confirms how house prices drive consumer spending. Their numbers relate to America, but they would undoubtedly also apply here; the authors discovered that changes in house prices have a larger impact on spending than changes in share prices, and that increases in property prices boost consumption by more than crashes cut it.
They found that an increase in real, inflation-adjusted housing wealth, of the sort seen in the US between 2001 and 2005, pushes up household spending by 4.3 per cent in total. A housing crash of the sort seen in 2005-2009, slashes consumer spending by around 3.5 per cent. There are usually two ways in which house prices impact spending: home owners feel richer; and they are able to extract equity by remortgaging or downsizing their homes.
The drop in inflation-adjusted house prices seen in Britain (excluding central London) over the past few years hit consumers; the slow recovery in mortgage lending and housing transactions could soon start to boost spending on the margins.
Osborne is certainly desperate for growth, ahead of this week’s likely bad news on fourth quarter GDP. His debt and deficit figures, released yesterday, make for grim reading. Public sector net borrowing hit £15.4bn in December 2012, £0.6bn higher than the £14.8bn seen in the month a year ago. As ever, public spending is growing faster than tax receipts, despite supposedly swingeing cuts.
At the end of December 2012, the public sector net debt excluding the temporary effects of financial interventions hit £1.111 trillion, equivalent to 70.7 per cent of GDP. A year ago, it stood at £1.009 trillion, or 66 per cent of GDP. The Chancellor is failing to bring the deficit down, and this means that the national debt is continuing to roar ahead.
It is to be hoped, therefore, that the government’s latest attempt at liberalising planning laws to allow developers to convert empty offices (outside of pure business districts such as the Square Mile) into homes actually materialises this time. By boosting housing capacity – by some estimates, if one in twenty empty offices were converted, 130,000 new homes could be built – it would reduce the chances of another property mini-bubble while bolstering GDP figures as a lot of the changes of use would involve construction work. It would also be a good policy in and of itself: the UK’s antiquated planning rules risk trapping us into a fossilised, antiquated society. Supply-side reforms of this kind, rather than yet more credit bubbles, are the only way the UK will return to sustainable growth.
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