Are house prices set to lead the global economy out of the mire, or are they creating a bubble? - The Share Centre Blog

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Michael Baxter

Are house prices set to lead the global economy out of the mire, or are they creating a bubble?

Written by: Michael Baxter on May 7th 2013

Category: Thought for the day

Europe, the UK and the US – three reports: housing market is the subject.   As far as the US and UK are concerned, there are signs that the days of the housing market slump are behind us, indeed boom may be on its way. Is this good news or bad?

Let’s start with the UK. The economic consultancy Fathom Consulting has claimed that the government’s help to buy scheme could push house prices up 30 per cent. Now whether this is a good or a bad thing, depends on your own perspective.  Today, the ‘Daily Mail’ and the ‘Daily Express’ both reported the story, and focused primarily on the upside.  The ‘Express’ quoted a financial advisor who said: “[An] upward move in house prices is definitely good news for many people.”

Strangely enough, while the two papers were bending over backwards to tell their readers about Fathom’s predictions of rising house prices, they were not so keen to report the Fathom slant on the story. In fact Andrew Brigden, a senior economist at Fathom – not to mention former Bank of England man (so he must be right) – said: “[The] Help to Buy is a reckless scheme that uses public money to incentivise the banks to lend precisely to those individuals who, absent the scheme, would not and should not be offered credit.” He continued: “Had we been asked to design a policy that would guarantee maximum damage to the UK’s long-term growth prospects and its fragile credit rating, this would be it.”

So, errr, on one hand you have articles saying “yippee, house prices set to rise,” and on the other hand you have an economist who says “woe is us, house prices set to rise.”

In the US, there is a report from Lender Processing Service suggesting that total loans in arrears have fallen below five million for the first time since 2008. First time delinquent loans made up just 0.84 per cent of the 50.2 million mortgages in March.

So these are the best stats since 2008, which is good. Bear in mind, however, that in January 2005 mortgages in arrears numbered just 2.2 million. So while things are looking better – a lot better –they still have a long way to fall before we return to what it was like before the financial crash.

And finally, the Eurozone’s news is that house prices fell 1.8 per cent across the region in Q4 last year, compared to the same quarter in 2011. They were down 12.8 per cent in Spain, 8.8 per cent in Slovenia, 6.1 per cent in the Netherlands, 6 per cent in Portugal, 4.6 per cent in Italy, 4.5 per cent in Ireland, 2.4 per cent in Slovakia and 1.7 per cent in France. They rose 5.8 per cent in Estonia, 5.4 per cent in Malta, 3.9 per cent in Luxembourg, 3.2 per cent in Finland, and 1.2 per cent In Belgium. Figures for Germany are not as current – the latest data for this country shows house price rises of 2.2 per cent in Q1 2012 over the year before.

Across the Euro area as a whole, house prices are roughly 5 per cent down on peak.

So what we conclude? There is no doubt that in some countries consumers spend more when house prices rise.  Let’s face it, it is good for your confidence if you know your net asset value has increased. An individual’s perception is often that saving becomes less important when you know your net wealth has risen. Furthermore, the higher your net wealth the easier it is to borrow money.

Let me remind you of the book ‘Faultlines’ by Raghuram Rajan, which suggested that rising house prices in the US provided the means for funding growth, even at a time when median wages were falling. Mr Rajan was a former chief economist at the IMF, so his theory must be right.

So there are reasons to think the great US housing market crash is over. In the UK there are reasons to think house prices will rise. This will do wonders for consumer confidence, and may lead to consumer led growth.

Yet I don’t like it. It seems to me we have learnt nothing from the bubble years. In the UK we need cheaper house prices not more expensive ones.  And I fear for what will happen if at some point in the future global inflation pressures build, and market pressures force real interest rates up.

I think the latest news on house prices in the UK and the US is an indicator that growth may rise, but we are playing with fire.

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Tags: great US housing market crash is over, Help to Buy, House prices eurozone, house prices to rise 30 per cent, UK house prices will rise, US loans in arrears

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