Is it a new bubble in house prices or just a modest and healthy recovery? There is a natural human reaction, after a catastrophic failure, to fear it will happen again. Actually the story is much more complex than “is there a new bubble?”, and perhaps more troubling.
The big picture first. Overall house prices are back to their peak but this conceals huge regional differences. London and the South are up, but the North, Scotland and Wales are still down. Northern Ireland is still way down, but its peak had been boosted by the boom south of the border. Over the past year London prices are up nearly 10 per cent and most of the rest of England is up a little. But in Wales, the North-east and North-west, and particularly Scotland, prices are still falling.
You can explain some of this divergence quite easily. The UK is not a single market. There is a single interest rate and more-or-less common mortgage availability, but demand varies greatly.
The London market tends to do best in the early stages of an economic expansion, for growth starts there and then spreads out. It has been further boosted by foreign demand at the top end, for the money invested there then spreads down, pulling up prices in the upper-middle market. And in the continuing mortgage famine it benefits from having a lot of cash buyers. In Scotland, though it is impossible to quantify, the relatively soft market may be associated with concerns about the outcome of the referendum on independence next year.
Strip out London and Scotland and on my quick tally prices are up by a little more than 1 per cent year-on-year. That is a lot lower than inflation and about the same as earnings growth. That cannot be a bubble.
It is, however, a concern for at least three reasons. One is this regional issue. The job growth is in London, the South-east and East Anglia. Some 40 per cent of the extra jobs created in the past year have been in London alone. There are pockets of job growth, sometimes considerable ones elsewhere – a bow to Jaguar Land-Rover’s extra 1,700 workers in Solihull – but not enough to change the big picture. (And yes, Solihull is only a whisker north-west of that invisible line between the Severn and the Wash that seems to divide the economy.)
Quite what you do about this is a huge question, and the house-price divide is a symptom rather than a cause. But if you look at figures such as the higher rate of new business formation in the South, it is a trend that seems set to continue.
The second concern is the wealth effect. It looks very much as though quantitative easing is benefiting owners of assets (including expensive houses) by inflating their value. Crudely, print shedloads of money and this goes to the “haves”, not the “have-nots” and not even the “have-not-yets”. Whatever the arguments for QE, it is having a number of adverse longer-term effects of which this is only one. Meanwhile, we have to build more houses, and bigger ones, in the places where people want to live.
Third, there is the charge that even a modest housing recovery brings the wrong sort of growth –driven by domestic consumption rather than exports and investment. That is right in a way but given what has happened over the past few years most people will think that we should be grateful for any growth we can get. In any case, exports will depend largely on demand in our main markets and it will take time to rebalance ourselves towards the fast-growing ones in Asia and away from slow-growing or shrinking ones in Europe. As for investment, that tends to respond to demand rather than lead it.
Conclusion: don’t worry about a bubble but watch the signals the housing market says about the economy.
Calmer markets that should allay our fears
This is the week of tapering. We will learn by how much the US Federal Reserve plans to cut back its monthly purchases of US treasury bonds, as it gradually tapers down these purchases until they end sometime next year. Purchases are currently $85bn a month and are expected to come down to $70bn or $75bn.
There are two reactions to this. One view in the US is to focus on the pace at which these purchases are ended, with the fear that if done too swiftly this will push up long rates and undermine the economy. (The US, like us, has seen a turn in its housing market but the price increases so far have been modest.) The other view is to welcome it as a sign of a return to normality.
One thing seems clear: the markets have calmed down. So 10-year treasury yields are now around 2.8 per cent, a little below gilts, and pretty much where they were a month ago. The forecasts for US growth next year range between 2.2 per cent and 3.3 per cent, with a Consensus Forecasts average of 2.7 per cent. That is not bad at all. My instinct is that fears about the ending of this US version of QE will prove just as unfounded as fears of the “fiscal cliff” earlier this year.