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| Ethel Austin Limited: MCR to takeover Ethel Austin Limited and Au Naturale Limited in administration. Companies trading as normal while buyer is sought. |
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| A new housing bubble |
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| Written by Will Peters | |
| Wednesday, 21 October 2009 15:49 | |
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Should we be alarmed at rising house prices? This morning the Motley Fool website ran an editorial piece addressing what they see as the biggest threat to the economic recovery. According to the Fool we should all be concerned about the sharp increase in house prices we are currently witnessing. Essentially the rises are so sharp, fast and unjustified that we could be witnessing a recession time housing bubble: According to property website Rightmove, the average asking price for homes in England and Wales increased 2.8% in the four weeks to October 10. It is one of the sharpest four-weekly rises Rightmove has ever recorded. The average asking price, at £230,184 is now 0.2% higher than a year ago, when UK and global financial markets seized up. The largest increases are in London, with asking prices up by 6.5% over the previous four weeks. These are gains that could suggest the emergence of a new bubble. However if we are to start talking about housing bubbles and of a return to an inflated housing market we need first to fathom whether what is happening is an overdue correction to fair value or a housing bubble. In the first scenario we could argue that this is just the housing market adjusting and covering some ground lost during the credit crunch and the recession that followed. If so we could see a slow down in this pace or rises as real value is eventually found. The second scenario is what interests us though. Overseas demand could be the cause. Remember that London is seeing the brunt of these price rises, and it is London that is a favourite with overseas buyers. A week pound could be fueling such demand. If this is the cause - then there is not much we can do to remedy this situation. But, surely overeas demand is only part of the issue - credit may not be flowing like it used to and we can safely assume that we are not witnessing a credit fueled binge - but interest rates are incredibly low. If this is the scenario then the Bank of England would be well advised to take a look at their stimulus actions. Quantitative easing must come to an end at the originally agreed date, and some guidance must be given to the UK economy on the possibility of raising interest rates. I argue that the time is NOW - remember the lag effect that monetary policy manipulation has on the economy. If the breaks are put on in the near future it will only be the distant future in which we see the effects. We simply cannot afford an inflationary future, and the house price rises are suggesting this is increasingly likely. 
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| Last Updated ( Wednesday, 21 October 2009 15:52 ) |
