If it was a Netflix mystery series, it would be the moment for the ‘big reveal’. After months of boasting about how she would make the UK the most competitive, dynamic, and indeed fastest growing economy in the G7 we finally have some idea of what Rachel Reeves is going to do to deregulate the UK. There is just one problem. She has opted for the worst possible way of loosening the rules – and Reeves will end up sparking an asset bubble.
After summoning regulators to Downing Street yesterday to tell her how to boost growth, some details have started to emerge of what Reeves is planning. According to a report in the Times, the Chancellor is looking at relaxing the rules on mortgage lending to allow banks and building societies to offer people bigger, and riskier loans, to make it easier for people to borrow more money. Right now, buyers can typically only borrow 4.5 times their salary, and there are affordability rules in place to make sure they can withstand higher interest rates. Scrap some of that, and it should give the housing market a boost.
But hold on. Is that really a good idea? Sure, Reeves desperately needs to do something. As the latest figures released yesterday showed, output is expanding at a miserable 0.1 per cent, and we may well soon be plunged back into a full-blown recession very soon. And yet, that does not mean that loosening the rules on mortgage lending is the right solution. In reality, there are two big problems.
First, the issue with the British housing market is not that people don’t borrow enough money. It is that we don’t build enough houses, and the very few we do build are not big enough, and are often in the wrong place. All that easing the borrowing rules will do is drive up prices for the homes we have, making property even more expensive. Next, the last thing the UK needs is yet more debt, and a speculative bubble.
If rising house prices were the key to economic growth, then the UK would be one of the best performing countries in the world. Unfortunately it isn’t. Indeed, given that the Chancellor’s massive borrowing and spending plans are likely to drive up inflation and interest rates, the chances are that all that debt she is about to allow will become genuinely unaffordable. The UK desperately needs a government that is serious about deregulation, and boosting growth. Instead we are going to get a speculative property boom – and that is the last thing we need.
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