Jeremy Warner's Outlook: Soft landing or housing-induced road crash?

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It seems like only yesterday that this column was routinely being headlined "another day, another set of buoyant housing statistics". Little more than a few months back the housing boom was still in full flood. Not any more.

It seems like only yesterday that this column was routinely being headlined "another day, another set of buoyant housing statistics". Little more than a few months back the housing boom was still in full flood. Not any more. Each new survey or set of data brings more evidence of a rapidly slowing market. According to figures released yesterday by the Bank of England, the number of new approvals for new mortgages tumbled to a five-year low last month, down by one-fifth on September.

Personally I won't believe the housing boom is finally over until I see the evidence of what happens after Christmas, when sentiment and sales traditionally pick up. Once people realise that 4.75 per cent - the present base rate - is as bad as it gets for interest rates, there may be a renewed surge in confidence, and the whole thing will begin overheating again.

But that's now very much the minority view. Most economists would point to either flat or gently falling prices from here on in. A growing number are predicting quite big falls. The reasons for the housing boom of the last seven years are well rehearsed. Growing prosperity in combination with exceptionally low unemployment and interest rates has made housing increasingly affordable, causing a sharp increase in demand in a market where supply is restricted.

Yet prices have risen so far, so fast, that they are now completely out of kilter with earnings. The prospect of interest rates at permanently lower levels than they once were justifies some of this leap beyond traditional prices to average earnings ratios. If unemployment remains low, that too might justify some step change in the historic relationship. But neither of these factors have ever seemed to me to justify the whole thing. Is it to be the hoped for soft landing, with prices stabilising for a period of years or falling just a little, or is there a more serious decline in prospect?

It's still too early to be sure, but certainly there are some nervous months ahead for the Government in the run-up to the general election. Labour's chief weapon in winning the landslide victory that most of us would predict is the Opposition's lack of appeal, yet the economy runs a close second. We are living through a period of unprecedented prosperity and refound confidence in our economic superiority. Labour is basking in this feel-good factor. Might the housing market undermine it?

In its last Inflation Report, the Bank of England suggested that the UK economy might have decoupled from the ups and downs of the housing market. In recent years, the association between house price inflation and consumption has been less strong than in earlier years, with consumption rising only in line with disposable incomes, but house prices continuing to rise in double digits. Again, however, it is too early to say this marks a definitive break in the old association between boom and bust in the housing market and the wider economy. Indeed, what it may more probably show is the strong relationship between rising house prices and the expectation of permanently lower interest rates.

What happens when house prices start to fall is still a hostage to fortune. There is bound to be some macroeconomic effect. The only question is how much, and whether other factors, such as tightness in the labour market and increased business investment, might compensate. Luckily for the Government, the election is likely to take place before we are certain of the answers.

UK utility prices

Ouch! we won't be able to light our homes or turn on the television at this rate. Ofgem has just whacked up electricity prices again. OK, so they're only going up by 6p a month but it's the principle that counts. Regulators are supposed to make things cheaper, especially for people who have no choice but to get their supplies of basic amenities from monopoly companies.

No longer so, it seems. Ofgem has decided that the companies which run the local electricity networks should be allowed to charge more for getting the juice from the national grid and into our homes. Admittedly the price increase (1.3 per cent on the average domestic bill) pales by comparison with the increases that households have seen this year because of soaring wholesale power prices.

But it is not just electricity where regulators are allowing monopoly suppliers to increase their prices. The cost of a first class stamp from the Royal Mail is going up 2p, or 7 per cent, and there is nothing we can do about it. On Thursday, we shall discover how much water charges are going to rise by. The industry wanted a 31 per cent increase, Ofwat produced a draft figure of 13 per cent and since then they have been arguing the toss. The one safe bet is the final figure will not be lower than 13 per cent.

After more than a decade of remorselessly cutting utility prices, the regulators seem to have run out of fat to cut from bloated organisations such as the regional electricity and water firms. On the contrary, they have decided they deserve an increase in bills to pay for their massive capital investment programmes. In the case of water it is £16bn and for power it comes to £5.7bn. There was a time when the utilities could finance this kind of sum, cut prices and keep the dividend tap turned on. Alas, no longer. We had all better get used to higher charges for the basic things of life because the regulators are not going to save us from paying more.


What's going on at the London Stock Exchange? The shares have taken off like a rocket over the past month on German press reports that merger talks with Deutsche Börse's Werner Seifert are back on again. The rumour mill was further fuelled last week by the story that Clara Furse, the LSE's chief executive, and her finance director, Jonathan Howell, have been spotted in Frankfurt.

In fact they were at their desks throughout the time they were alleged to have been in Frankfurt. Still, never mind. Mr Seifert definitely was in London and was overheard on the plane back saying he'd been here for "negotiations". Right now, however, he's far too busy on an eight-city tour of Germany to promote his latest jazz CD - he plays the Hammond organ - to be worried about such mundane matters as buying the LSE. Even so, he's said to be confident that a marriage can be cemented by the middle of next year.

There's rarely smoke without fire but, as the LSE points out, if there had been any material discussions, it would by now have had to announce them. Furthermore, Ms Furse and Mr Howell together bought 30,000 shares in the LSE last week. Admittedly, this was as beneficiaries of a trust but you would have thought they might have stopped the transaction had they been in possession of inside knowledge of an imminent takeover. It would be acutely embarrassing if it subsequently turned out they were.

All the same, few have any doubt that there will eventually be a deal, if not with Deutsche Börse, then with its Paris-based rival Euronext, which already owns the London futures exchange, Liffe. In Paris, there is still a suspicion that Ms Furse hasn't yet forgiven Euronext for being outbid for Liffe. She'd sooner tie the knot with the ebullient Mr Seifert than Euronext's Jean-Francois Theodore.

Whether either of them can afford to pay the necessary bid premium is a not unimportant matter that seems to have got lost somewhere in the mix. The competition issues are also not inconsiderable. Mr Seifert would like to abandon the name Deutsche Börse in favour of something more international. Yet he first needs an international presence and to bid for the LSE, even on agreed terms, risks sparking an auction with Euronext. Better for the moment to stick to the jazz.