Sunday, June 13, 2021
A red hot housing market adds fuel to the inflation fire
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt. Not to be reproduced without permission.

There was a time, before everything went a bit bonkers, when an article about house prices was guaranteed box office. Maybe it is time to relive those days, at least for a while, because the housing market is showing plenty of signs of exuberance, which some see as dangerous.

Most measures have the rate of house-price inflation close to or above 10 per cent. Halifax has the rate at 9.5 per cent, Nationwide 10.7 per cent, and the official measure from the Office for National Statistics 10.2 per cent. Stay with me and I shall reveal that parts of the country are experiencing even more spectacular price rises.

This is not just about a particular sector of the economy. Andy Haldane, who will be stepping down shortly as the Bank of England’s chief economist, described the housing market recently as “on fire” with price rises generating further inequality, including inequality between the generations. Haldane sees roaring house prices as part of a more general inflation problem, which risks allowing the inflation genie to get out of the bottle.

He is not the only one to worry. Lord (Mervyn) King, the former Bank governor, writing for Bloomberg, worries that central banks, including the Bank, have “painted themselves into a corner”. As he put it: “Support for monetary policy as the way to combat inflationary risks is declining. Over the next few years, governments will probably want to spend more, but won’t want to increase taxes on most citizens. Higher interest rates, or a shrinking of central-bank balance sheets, will make it more difficult for governments to finance their deficits. Inevitably, there’ll be political pressure on central banks to respond slowly to signs of higher inflation.”

More on that in a moment. But what about house prices themselves? Some of those regional increases are spectacular. The e.surv-Acadata monthly index, which uses Land Registry data, had annual house-price inflation at 11.7 per cent, or 15 per cent excluding London and the southeast. The biggest annual increase over the past three months was in the northwest, up 15.7 per cent.

RICS, the Royal Institution of Chartered Surveyors, noted in its latest residential market survey, for May, that the disparity between housing demand and supply was driving prices higher, with no sign of an easing up. Estate agents are suffering from a lack of new instructions to sell alongside strong demand from buyers.

The house-price boom is testimony to the power of government intervention. Rishi Sunak’s stamp duty cut, first announced in July last year and extended in his March budget, has significantly boosted both prices and activity. The furlough scheme, now winding down, appears on course to achieve its central aim, of preventing a big surge in unemployment. Home buyers, meanwhile, have little fear of sharply rising interest rates.

Lower transaction costs (the stamp duty cut) a benign unemployment outlook and cheap borrowing have provided a potent brew. Respondents to the RICS survey reported “frenetic” efforts to beat the stamp duty deadline and a “pressure cooker”, though some are already getting ready for an easing in the second half of the year.

This is because one of these elements is soon to come to an end. The full stamp duty cut (no duty for most on purchases up to £500,000) only lasts until the end of June and will be phased out in reduced form by September 30.

At one time, housing market analysts thought that the combination of the end of the stamp duty reduction and a post-furlough rise in unemployment would lead to a fall in house prices. I never thought that, but it is reasonable to expect that house-price inflation will start to come back down to earth when the stamp duty cut stops providing an incentive to bring forward purchases. That does not mean falling prices, but it should mean an easing of the pace at which they are rising.

Is housing part of more general inflation problem? As I have written before, inflation is going up, the only question is by how much and for how long. The next few months will be a time of great nervousness for inflation worriers.

Apart from a rise in consumer price inflation to above the official 2 per cent target, and perhaps to 3 per cent before the end of the year – US inflation last week hit 5 per cent - there will be further evidence of price pressure in raw material and fuel prices. Crude oil prices this time last year were off their lows but Brent crude now, at more than $70 a barrel, is nevertheless up by 74 per cent over the past 12 months.

Those who are worried about a wage-price spiral, and that includes Haldane, will have ammunition in the expected jump in annual average earnings growth to 7 or 8 per cent very soon, something we have not seen this century. The calculations on this are straightforward. Even if average earnings were just to stay at their January-March level in the current April-June quarter, they would show an annual rise of 6.8 per cent. It will not take much to push annual pay growth above 7 per cent.

Most of that will reflect base effects – comparisons with depressed year-ago levels – and furlough distortions, which should drop out over time. There is a good chance, using similar arithmetic, that by September, annual growth in average earnings will be back down to 2 or 3 per cent.

For average earnings, for house prices, and in time for consumer price inflation, the prospect is for a temporary or “transitory” boost, followed by a return to more normal levels. This, in other words, is a “don’t panic” moment.

That is not as comforting as it sounds, however. As King noted, there remain plenty upside risks to inflation over the medium-term, which central banks should be concerned about. There was case for proceeding cautiously after the global financial crisis just over a decade ago, when growth was fragile and often tentative.

But there is no case for that now. The post-pandemic party has started and the Bank and other central banks should be giving serious thought to removing some of the emergency support, including record low interest rates and the lashings of quantitative easing (QE) they provided during the pandemic. Whether they will do so is another matter.