Finally, reality is acknowledged by UK banks. 30% increases in house values is OK if wages are going up by the same amount. They are not of course. Similarly an average house price of £146k is alright if two people are earning an average wage...just. £21.5k X 2 = £43k. Price still over 3 times earnings though. And that is without kids. Cost of nannies going through the roof.
Huge mismanagement by Gordon Brown and the Banks imho.
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Bank fears housing crash
news.bbc.co.uk
By Steve Schifferes
BBC News Online economics reporter
The Bank of England will warn next week of the dangers of a collapse in house prices.
It is expected to say that it cannot cut interest rates to boost the flagging manufacturing sector for fear of launching a runaway boom in house prices that could suddenly burst, plunging the economy into recession.
The Bank of England left interest rates unchanged last week at 4% despite a cut in US rates from 1.75% to 1.25%.
Members of the Bank's Monetary Policy Committee (MPC) are worried that the consumer boom keeping the UK economy afloat is being driven by people cashing in on high house prices.
They fear that if the housing boom goes into reverse, the huge debts individuals have taken on could become unmanageable, driving down consumer spending.
The Bank of England will be releasing its latest inflation forecast on Wednesday, and it is likely to say that despite the high house prices, overall inflation is likely to remain below its 2.5% target range for the foreseeable future.
Last week the Halifax said that house prices were rising at a record 30.4% annually, with a rise of nearly 5% in October alone.
And the Land Registry found that an average property in England and Wales is now worth £146,150,compared with an average value of £123,856 a year ago.
And estimates show that equity withdrawal - where people get a higher mortgage in order to finance current spending - is rapidly increasing.
The Centre for Economics and Business Researach says that it has reached £40bn, or 6% of consumer spending.
The house price boom has now reached the levels of the l988/89 boom, which ended in a sharp correction coupled with high interest rates, negative equity and a recession.
Total consumer debt, including mortgages, has reached £800bn, and is rising by 14% per year.
The difference between l989 and the current situation is interest rates, which are at historic lows, compared to the doubling of rates from 7.5% to 15% during the early l990s.
Unemployment is also lower now, and rising real incomes are fuelling the house price boom.
That means that so far housing is still more generally affordable - except for first-time buyers in the Southeast.
So far the potential effect of job cuts and lower wages on housing prices has been most evident for luxury homes in London.
The top end of the London market has been hit by a reduction in City bonuses and large-scale layoffs, with prices in Kensington and Chelsea (which has the highest average house prices in the country) falling by around 15%.
Government plans
There is speculation that the Chancellor may want to tackle house prices in his pre-Budget report, which is likely to take place on 26 November.
The Chancellor may be tempted to raise further stamp duty, which he has already increased substantially before, to stop speculative purchases of houses.
The difficulty will be that such a tax would be seen as yet another attack on the middle class, who could also face cuts to their pension contribution tax rebates and higher university tuition fees.
However, the effect of rising house prices has been to sharply increase the Chancellor's tax take from stamp duty already.
A study commissioned by Radio 5 Live suggested that, within a decade, one in four households will be paying the higher rate of 3% of stamp duty when they moved house.
The report's author, Professor Steve Wilcox of York University, warned that stamp duty could have negative economic consequences.
"Stamp duty is a tax on mobility, that penalises households that move more frequently," he said. |
