House prices are starting to overheat but economy has a new thermostat

It is a safe bet that when the latest figures for the monthly rise in house prices are published at the end of this week, the mortgage lenders will insist there is no danger at all of the housing market overheating - whatever the size of the increase in prices.

It is a safe bet that when the latest figures for the monthly rise in house prices are published at the end of this week, the mortgage lenders will insist there is no danger at all of the housing market overheating - whatever the size of the increase in prices.

"Buoyant, but not overheated," Nationwide said last week when it revised up its forecast for house price inflation this year from 8 per cent to 11 per cent.

For that assessment to remain true, however, many economists believe the Monetary Policy Committee might have to nudge interest rates higher still, following September's quarter point rise to 5.25 per cent. For the housing market is one of the classic early warning signals of inflationary pressure in the UK economy, and it is starting to give some cause for concern.

One indicator is simply the pace of increase in house prices. The two measures that catch the headlines regularly are the figures calculated by two big lenders, Nationwide and Halifax. Last week the former reported a 3.2 per cent rise in the national average house price during the third quarter, taking it to a level 9 per cent higher than a year earlier.

A few days earlier Halifax estimated the quarterly rise at 4.3 per cent, the biggest jump since the late 1980s, and a pick-up in the annual rate to 8.8 per cent, likewise the highest for a decade.

These two measures are based on prices in the transactions in which Nationwide and Halifax are lending money. Official figures based on all UK residential property deals, published with a longer delay, show an even more pronounced rise in prices. This index shows house prices have gained almost 45 per cent in six years.

Thanks to rapid increases in the value of houses, another late-1980s phenomenon has returned: mortgage equity withdrawal. This is defined as net lending secured on dwellings less investment in dwellings, where this includes money spent on structural repairs and purchases of newly built housing. Equity withdrawal can occur in a variety of ways - by taking out a secured loan without moving, by borrowing more than strictly needed to move house, by trading down or through inheritance.

According to estimates by Dresdner Kleinwort Benson, the City investment bank, net mortgage equity withdrawal amounted to £1bn in the first quarter of 1999 and more than £2bn in the second quarter. Preliminary data suggest it increased further in the third quarter.

Consumers spend more when they feel wealthy because of gains in asset prices, especially house prices. The household sector's ratio of wealth to income has now also returned to its late 1980s highs.

The extent of equity withdrawal so far has been enough to have boosted consumption growth by 2 per cent a year, compared with actual 4-4.5 per cent spending growth in the first half of this year, if it had all been spent, says DKB economist David Owen.

Of course, it will not have been fully spent, but the calculations do indicate the potential mortgage equity withdrawal has to tip the economy over from buoyancy to overheating.

"Equity withdrawal was one of the principal reasons why economists underestimated the strength of consumer spending in the late 1980s," Mr Owen says.

There is nothing in recent figures to suggest that the nascent housing boom will slow naturally. Lending secured on housing is a third higher than a year ago. House purchase is still very affordable, not least because of the fact that interest rates remain low compared with the recent past. Mortgage payments amount to 18 per cent of earnings on average, well below the 1989 peak of 42 per cent. Unemployment is low and still falling, while average earnings growth is accelerating and well ahead of underlying inflation.

It is true, as all the lenders argue, that the housing market is patchy. London dominates all tables of regional house price increases, with an average year-on-year rise of 20 per cent according to the Halifax figures, 15 per cent according to Nationwide.

And even within regions there can be great contrasts. Bradford has seen an average price rise of 10 per cent in two years, whereas in neighbouring Leeds the increase has been 18 per cent.

However, the same pattern has characterised the early stages of every housing boom. In 1987 some commentators dismissed talk of an impending boom by arguing that all the overheating was in London. It was true - for a while.

In its recent report Nationwide argued that homeowners had not yet forgotten the pain of the early 1990s crash in the housing market. The level of house prices remains well below the late 1980s peak, so there remains less housing equity wealth to withdraw. Tax relief has been chopped back and goes altogether in April, and stamp duty has risen.

"Conditions look a long way removed from the buoyancy experienced through much of the eighties," it concluded.

Mr Owen adds another reason for not being as concerned this time around. That is the generally more favourable inflationary backdrop, a result of structural change in the economy.

He says: "A secured loan to purchase a car from Belgium via e-commerce would not prove domestically as inflationary as one that added directly to excess demand here in the UK." DeAnne Julius, one of the MPC's prominent doves, picked up on this theme in a lecture she gave at the University of Birmingham last week.

She suggested the UK's experience in the 1970s and 1980s was going to prove a poor predictor of growth and inflation during the 1990s. "Firms and households are learning new behavioural patterns in response to the new technologies and competitive pressures facing them," she said.

So, while the housing market is displaying clear signs of being at the beginning of one of its periodic booms, one that might yet require higher interest rates, it is unlikely to prove a repeat of the last boom. On top of structural changes, we do have a firmly pre-emptive Bank of England setting loan rates. The housing market might be starting to overheat, but the economy has a new thermostat.

PROMOTED VIDEO
Arts and Entertainment
The Apprentice candidates Roisin Hogan, Solomon Akhtar, Mark Wright, Bianca Miller, Daniel Lassman
tvReview: But which contestants got the boot?
Arts and Entertainment
Jim Carrey and Jeff Daniels ride again in Dumb and Dumber To
filmReview: Dumb And Dumber To was a really stupid idea
News
people

Jo from Northern Ireland was less than impressed by Russell Brand's attempt to stage a publicity stunt

Sport
Scunthorpe goalkeeper Sam Slocombe (left) is congratulated by winning penalty taker Miguel Llera (right)
football
Life and Style
A woman walks by a pandal art installation entitled 'Mars Mission' with the figure of an astronaut during the Durga Puja festival in Calcutta, India
techHow we’ll investigate the existence of, and maybe move in with, our alien neighbours
Arts and Entertainment
Sir Ian McKellen tempts the Cookie Monster
tvSir Ian McKellen joins the Cookie Monster for a lesson on temptation
News
i100
Travel
Tourists bask in the sun beneath the skyscrapers of Dubai
travelBritish embassy uses social media campaign to issue travel advice for festive holiday-makers in UAE
Arts and Entertainment
Jennifer Saunders stars as Miss Windsor, Dennis's hysterical French teacher
filmJennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress
Life and Style
tech
Sport
Nabil Bentaleb (centre) celebrates putting Tottenham ahead
footballTottenham 4 Newcastle 0: Spurs fans dreaming of Wembley final after dominant win
Life and Style
Sebastian Siemiatkowski is the 33-year-old co-founder and CEO of Klarna, which provides a simple way for people to buy things online
tech
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Ashdown Group: Java Developer - Hertfordshire - £47,000 + bonus + benefits

    £40000 - £470000 per annum + bonus: Ashdown Group: Java Developer / J2EE Devel...

    Ashdown Group: Direct Marketing Manager - B2C, Financial Services - Slough

    £45000 - £55000 per annum + Benefits: Ashdown Group: An exciting opportunity h...

    Carlton Senior Appointments: Sr Wealth Manager - San Francisco - Inv AdvisoryFirm

    $125 - $175 per annum: Carlton Senior Appointments: Senior Wealth Manager – In...

    Carlton Senior Appointments: Private Banking Manager - Intl Bank - Los Angeles

    $200 - $350 per annum: Carlton Senior Appointments: Managing Producer – Office...

    Day In a Page

    Jeb Bush vs Hillary Clinton: The power dynamics of the two first families

    Jeb Bush vs Hillary Clinton

    Karen Tumulty explores the power dynamics of the two first families
    Stockholm is rivalling Silicon Valley with a hotbed of technology start-ups

    Stockholm is rivalling Silicon Valley

    The Swedish capital is home to two of the most popular video games in the world, as well as thousands of technology start-ups worth hundreds of millions of pounds – and it's all happened since 2009
    Did Japanese workers really get their symbols mixed up and display Santa on a crucifix?

    Crucified Santa: Urban myth refuses to die

    The story goes that Japanese store workers created a life-size effigy of a smiling "Father Kurisumasu" attached to a facsimile of Our Lord's final instrument of torture
    Jennifer Saunders and Kate Moss join David Walliams on set for TV adaptation of The Boy in the Dress

    The Boy in the Dress: On set with the stars

    Walliams' story about a boy who goes to school in a dress will be shown this Christmas
    La Famille Bélier is being touted as this year's Amelie - so why are many in the deaf community outraged by it?

    Deaf community outraged by La Famille Bélier

    The new film tells the story of a deaf-mute farming family and is being touted as this year's Amelie
    10 best high-end laptops

    10 best high-end laptops

    From lightweight and zippy devices to gaming beasts, we test the latest in top-spec portable computers
    Michael Carberry: ‘After such a tough time, I’m not sure I will stay in the game’

    Michael Carberry: ‘After such a tough time, I’m not sure I will stay in the game’

    The batsman has grown disillusioned after England’s Ashes debacle and allegations linking him to the Pietersen affair
    Susie Wolff: A driving force in battle for equality behind the wheel

    Susie Wolff: A driving force in battle for equality behind the wheel

    The Williams driver has had plenty of doubters, but hopes she will be judged by her ability in the cockpit
    Adam Gemili interview: 'No abs Adam' plans to muscle in on Usain Bolt's turf

    'No abs Adam' plans to muscle in on Usain Bolt's turf

    After a year touched by tragedy, Adam Gemili wants to become the sixth Briton to run a sub-10sec 100m
    Calls for a military mental health 'quality mark'

    Homeless Veterans campaign

    Expert calls for military mental health 'quality mark'
    Racton Man: Analysis shows famous skeleton was a 6ft Bronze Age superman

    Meet Racton Man

    Analysis shows famous skeleton was a 6ft Bronze Age superman
    Garden Bridge: St Paul’s adds to £175m project’s troubled waters

    Garden Bridge

    St Paul’s adds to £175m project’s troubled waters
    Stuff your own Christmas mouse ornament: An evening class in taxidermy with a festive feel

    Stuff your own Christmas mouse ornament

    An evening class in taxidermy with a festive feel
    Joint Enterprise: The legal doctrine which critics say has caused hundreds of miscarriages of justice

    Joint Enterprise

    The legal doctrine which critics say has caused hundreds of miscarriages of justice
    Freud and Eros: Love, Lust and Longing at the Freud Museum: Objects of Desire

    Freud and Eros

    Love, Lust and Longing at the Freud Museum