The Financial Times reports today that the indications are that the low interest rates are helping house prices to rebound. Personally I am horrified by the fact that such a situation is not being highlighted with greater concern by the government, economists and sane people generally.
The article itself hardly highlights the worrying matrix of fundamentals that means that any such rebound is likely to simply result in more people overstretching themselves and house prices taking longer to correct to a more realistic level reflecting earnings, affordability and available finance.
At the height of the boom there were some who warned that the housing market was becoming overheated and that the Bank of England needed to consider raising interest rates to control the growth rate of house prices which was outstripping any increase in wages. The BoE, whose main point of reference for setting interest rates is an inflation measure which takes no account of house prices did not react (or certainly did not react sufficiently) and house prices continued to show hyper-growth. Compare this to inflation generally (whether CPI or RPI) which, whilst higher than the levels considered "safe" did not even come close to house price growth levels (and thankfully so). The fact is people who own houses are happy with double-digit growth in their value as it means more equity and therefore, with banks happily splashing the cash, more money for them to spend now and worry about paying back later.
House prices have now fallen slightly and may, in some areas, reflect a fair value. If you look at annual house price inflation on an annually compunding basis from 1983 until today the annual rate is 6.55%. Some might not consider this too high. For the period from 1991 until 2009 annualised wage inflation on a annual compounded basis was at 4.2% (based on the LNMM index figures from the ONS). House price inflation over the same period was about 4.63%. That difference in growth could even be a statistical error.
However the real issue now is one of liquidity and equity. The FT highlights this by referring to the fact that the rebound has been effectively caused by low interest rates. But rates will not remain low forever and when they increase all those people managing on SVRs at or below the fixed rates they took out will suddenly be faced with increases in their monthly outgoings. Apart from the handful of bankers with huge bonuses most of us are not anticipating any pay inflation this year! This at a time when many other costs will have already increased as a result of the fact that we have not seen the massively overanticipated deflation. The risk is that we then see a rush to sell up and downsize to a more affordable house with the oversupply finally bringing much needed liquidity to the market and almost certainly a reduction in prices. The number of people able to buy and the amount they are able to spend is reduced due to lack of finance and so house prices will have to fall.
Therefore, triumphally declaring that low interest rates have saved the housing market from collapse is equivalent to saying that giving morphine to the terminally ill patient has saved his life. You can take away the pain for a time but eventually time runs out.
