Even if it is a housing bubble, it can bring benefits

The story is more complex than whether or not we are entering a bubble

Share

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.

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Recruitment Genius: Field Based Sales Surveyor - OTE £40,000

£16000 - £40000 per annum: Recruitment Genius: A Field Based Sales Surveyor is...

Ampersand Consulting LLP: UI Designer/ User Interface Designer (UI, User Flow, Design)

£6000 - £60000 per annum + Bonus and Benefits: Ampersand Consulting LLP: UI De...

Investigo: International Finance Analyst

£270 - £300 per annum: Investigo: An exciting opportunity to join an internati...

Recruitment Genius: CAD / CAM Ladies Cocktail & Eveningwear Gerber Grader

£25000 - £35000 per annum: Recruitment Genius: This is an exciting opportunity...

Day In a Page

Read Next
 

Daily catch-up: stupid questions in opinion polls, in the House of Commons and in job interviews

John Rentoul
 

i Editor's Letter: The demise of a Sixties monster

Oliver Duff Oliver Duff
Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

Cameron, Miliband and Clegg join forces for Homeless Veterans campaign

It's in all our interests to look after servicemen and women who fall on hard times, say party leaders
Millionaire Sol Campbell wades into wealthy backlash against Labour's mansion tax

Sol Campbell cries foul at Labour's mansion tax

The former England defender joins Myleene Klass, Griff Rhys Jones and Melvyn Bragg in criticising proposals
Nicolas Sarkozy returns: The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?

Sarkozy returns

The ex-President is preparing to fight for the leadership of France's main opposition party – but will he win big enough?
Is the criticism of Ed Miliband a coded form of anti-Semitism?

Is the criticism of Miliband anti-Semitic?

Attacks on the Labour leader have coalesced around a sense that he is different, weird, a man apart. But is the criticism more sinister?
Ouija boards are the must-have gift this Christmas, fuelled by a schlock horror film

Ouija boards are the must-have festive gift

Simon Usborne explores the appeal - and mysteries - of a century-old parlour game
There's a Good Girl exhibition: How female creatives are changing the way women are portrayed in advertising

In pictures: There's a Good Girl exhibition

The new exhibition reveals how female creatives are changing the way women are portrayed in advertising
UK firm Biscuiteers is giving cookies a makeover - from advent calendars to doll's houses

UK firm Biscuiteers is giving cookies a makeover

It worked with cupcakes, doughnuts and macarons so no wonder someone decided to revamp the humble biscuit
Can SkySaga capture the Minecraft magic?

Can SkySaga capture the Minecraft magic?

It's no surprise that the building game born in Sweden in 2009 and now played by millions, has imitators keen to construct their own mega money-spinner
The King's School is way ahead of the pack when it comes to using the latest classroom technology

Staying connected: The King's School

The school in Cambridgeshire is ahead of the pack when it comes to using the latest classroom technology. Richard Garner discovers how teachers and pupils stay connected
Christmas 2014: 23 best women's perfumes

Festively fragrant: the best women's perfumes

Give a loved one a luxe fragrance this year or treat yourself to a sensual pick-me-up
Arsenal vs Borussia Dortmund: Alex Oxlade-Chamberlain celebrates century with trademark display of speed and intuition

Arsenal vs Borussia Dortmund

The Ox celebrates century with trademark display of speed and intuition
Billy Joe Saunders vs Chris Eubank Jnr: When two worlds collide

When two worlds collide

Traveller Billy Joe Saunders did not have a pampered public-school upbringing - unlike Saturday’s opponent Chris Eubank Jnr
Homeless Veterans Christmas Appeal: Drifting and forgotten - turning lives around for ex-soldiers

Homeless Veterans Christmas Appeal: Turning lives around for ex-soldiers

Our partner charities help veterans on the brink – and get them back on their feet
Putin’s far-right ambition: Think-tank reveals how Russian President is wooing – and funding – populist parties across Europe to gain influence in the EU

Putin’s far-right ambition

Think-tank reveals how Russian President is wooing – and funding – populist parties across Europe to gain influence in the EU
Tove Jansson's Moominland: What was the inspiration for Finland's most famous family?

Escape to Moominland

What was the inspiration for Finland's most famous family?