House prices are supposedly due to fall by as much as 12 per cent in 2023. There is a cost-of-living crisis. Taxes are at record highs. Inflation at around 10 per cent is bringing Britain to a standstill thanks to a series of strikes over pay by everyone from nurses to border guards.
Much of this has been caused by the war in Ukraine and the
resulting rise in energy prices.
But it is also due to the Government and the Bank of
England’s reckless money-printing programme which dates back to 2008 when the
capitalist system almost imploded.
Finally, in December 2021, the Bank of England woke up to
the idea its 21-month-long 0.1 per cent base rate was childish and nonsensical
and started, slowly and cautiously, raising interest rates to the present, still
historically-low, 3.5 per cent.
Given the Bank’s one and only Government-imposed task, when
it comes to interest rates, is to keep inflation at two per cent, it has failed
abysmally and must share much of the blame for the economic crisis and our
winter of discontent.
The question is why did the Bank get it so wrong? If we
discount the war and the pandemic and even the credit crunch of 2008, when
there is some justification for lowering interest rates to keep the economy
alive, the Bank still failed to react fast enough to the threat of inflation.
And we have to recognise that inflation – for a time
presumed to be dead but, in reality, merely waiting to pounce – is still and
always the economy’s greatest enemy.
The answer is in the way inflation is calculated – the
statisticians fail to take into account the single most obvious and pernicious
inflationary stimulus of them all: house prices.
There are technical arguments about why house prices are
excluded from the calculation, largely to do with the fact that a house is a
capital good, not a direct influence on the day-to-day cost of living.
However, neglect of house price inflation is one of the
prime causes of this bout of inflation. And analysis of previous economic
cycles shows this neglect his stimulated inflation in the past and forced the
Bank (and before that, politicians) into belated attempts to retrieve the
situation.
The rate of house price inflation is a clear and obvious
indicator that the official inflation rate is set to rise sharply and that the
Bank base rate must be increased. Failure to take account of house prices in
the official calculation of inflation means the Bank is condemned to reacting
too late. By the time it puts up the cost of borrowing, the inflationary damage
has already been done.
If we look at previous inflationary spikes, this becomes
clear.
In 1972, house prices rose 26.7 per cent and another 39.8
per cent the following year. Official inflation was at 7.1 and 9.2 per cent;
base rates at five per cent rising to 8.2 per cent. In 1974, they had to rise
to 12.75 per cent as the Barber boom turned to bust.
The 1988 Lawson boom and bust had inflation at just 4.9 per
cent, base rates at 8.3 and house prices running away at 10.3 rising to 32 the
following year. Too late – again – interest rates rose to peak at 14.79 in
1990. High interest rates persisted through the 1990s – partly because of the
Government’s ridiculous European exchange rate disaster – and house prices
actually fell while inflation was tamed for the time being.
In the early 2000s, the official inflation rate was down
around two per cent but house prices were once again soaring ahead – 25.8 per
cent in 2003, 16.9 per cent the following year. Interest rates were around four
per cent. But the failure to consider the housing market boom was the cause not
of inflation, this time, but of something even worse – the financial crisis
when it looked, for a moment, as if the entire capitalist system might come
crumbling down.
If the Bank recognised the early warning presented by rising
house prices, and if it had put up interest rates in response, would it have
averted this disaster? Possibly, though of course we will never know.
The rock bottom interest rates we had for more than a decade
after the 2008 crash have inevitably stimulated greater borrowing and soar-away
house prices (exacerbated by the quantitative easing money-printing indulged in
by the Government and the Bank to the tune of an incomprehensible £875 billion.
Between January 2009 and July 2022, the average house price
rose 73 per cent, from £157,234 to £272,111. Had house prices risen with the
official inflation rate, the average home would have cost £222,240 last July, a
rise of 41 per cent.
Prices really took off after the pandemic but the Bank, slow
to react, as usual, was still fiddling about with piffling rates of interest.
It only started to take action when the official inflation rate began to rise,
ignoring the early indicator of yet another over-heating housing market.
The failure to account for house price increases may be
justified by economic purists but the evidence strongly suggests they feed into
the economy as a whole and lead inexorably to rising prices.
This is inevitable, if only because home-owners see the
value of their biggest asset rising and, as a result, their mortgage debt is,
in effect, shrinking. They are encouraged to spend the extra wealth they do not
actually possess, or they can cash in by increasing the amount of money they
are borrowing. Either way, it leads to delusions of prosperity and results in too
much money chasing too few goods.
By the time the Bank notices, in the official inflation
figures, it is too late. The time has come to insert this massively significant
aspect of the economy into the way inflation is calculated.
In the USA, house prices were included in the calculation of
inflation from 1953 to 1983 despite the economists’ specious arguments. House
prices were removed from America’s inflation calculations because their
presence was increasing the rate of inflation and, therefore, increasing the
cost of index-linked benefits and pensions.
But if appropriate and timely action were taken by the Bank
of England, that should not become a danger. Indeed, it would save the State\
money by ensuring policies like the pension triple-lock do not become as
expensive as an average terraced house in London.
In short, our cost-of-living crisis has been caused in great
part by the refusal of economists to recognise the inflationary elephant in the
room. As a result, house prices have once again trampled all over the economy
and we are all now paying a heavy price.
No comments:
Post a Comment