The Bank of England’s chief economist just killed the argument that low interest rates are to blame for Britain’s soaring property prices.
UK interest rates have stayed at a record low of 0.5% since March 2009. This has stimulated the economy because it lowers the cost of borrowing money — meaning it’s easier to get a mortgage for a house.
Some critics have been quick to blame Britain’s runaway house prices on low rates, which allow more people to get on the housing ladder. More competition means rising prices.
However, Andy Haldane highlighted on BBC Radio 5Live, following his speech to the trade union body TUC last night, how low-interest rates merely speed up or slow down the rate of borrowing. The key issue in the housing market is the fact there are simply not enough houses being built (emphasis ours):
I have huge amounts of sympathy for those struggling to get on the housing ladder. What we can do as the Bank of England is sometimes to take a light touch on the tiller, to either slow down or indeed to speed up borrowing for mortgages or for other things if that looks as if it’s getting slightly out of kilter, out of whack.
What we can’t do, which actually is the most important thing, is to build new houses. We can’t supply new houses to the market and ultimately it’s that shortage of supply of houses that is keeping house prices high and which is causing them to rise. We can smooth out, we can moderate the demand for housing, but we can’t do anything about the supply, unfortunately.
The Confederation of British Industry (CBI) warned last year that 240,000 properties need to be built annually in order to accommodate rising demand across the country. Unfortunately, over the last 14 years, over 200,000 homes have been delivered annually in just four periods.
The average price of buying a property in Britain is £284,000 ($US431,874), according to the Office for National Statistics. But it’s far worse in London is the worst, where the average price is now at £522,000 ($US793,849).
This week, the Royal Institution of Chartered Surveyors (RICS) said in its Residential Survey for October that UK house prices are expected to rise by 4.5% a year over the next five years (a cumulative increase of around 25%). The chief economist at RICS said that property will become increasingly “unaffordable” during this time.
Estate agent Savills added more fuel to the fire by saying it is “becoming clear that the current conditions in the UK housing market are unlikely to be a temporary phenomenon.”
“The market conditions we called ‘normality’ 10 years ago will not be resumed anytime soon. The structure of the housing market has changed, if not permanently, then at least for the foreseeable future.”
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