Low interest rates and government subsidies are stoking a housing market boom, which brings huge dangers. Prices are rising rapidly across the country. Mortgage approvals for house purchases rose over 40 per cent in the year to January. They are still below long-term averages, but that will not be true for long. Rising house prices mean rising indebtedness, and that is why the Office for Budget Responsibility now forecasts household debt to rise back to its 2007 peak relative to income. My own forecast is for 10 per cent gains in house prices this year and next. Rising debt may not cause a financial crisis because the regulators can force banks to hold enough capital to protect them from a price crash. But homeowners may not be as well protected. Highly leveraged households will certainly be more vulnerable to an economic downturn. The higher debt is, the worse any downturn will be when it eventually comes. Rob Wood is chief UK economist at Berenberg Bank.
On one level, it is impossible to predict which sectors will be connected to future financial crises. But I think there is one reason to doubt UK housing will be involved in a future financial crisis: government policy. UK planning regulations are extremely tight. This is why London rents are so high; this is why British houses are the smallest in Europe; this is why getting planning permission makes a plot of land many multiples more valuable. Simply put, too few houses are built because builders are not allowed to build them. On top of that, the government has introduced Help to Buy, which appears to be driving house prices up rapidly with little boost to supply. Altogether, this suggests house prices are very unlikely to fall enough to generate a financial crisis like we saw in 2007-08. And if they looked like doing so, the government would be likely to stop them. Ben Southwood is head of macro policy at the Adam Smith Institute.
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