Anyone who doubts that the fiscal response to the pandemic has stoked inflation needs to look at the latest figures from the Nationwide on the housing market. Yet again they confirm that the deepest recession in modern history has been accompanied by a boom in house prices. Moreover, the inflation does not seem to have been reined-in by the ending of the stamp duty holiday. The price of the average home, according to the building society, rose by a further 0.9 per cent in November to reach £252,687. This is ten per cent up on last November and 15 per cent up on March 2020, at the beginning of the pandemic.
It is an absurd situation. Just how can a global crisis which temporarily put several million people out of work in Britain have resulted in a housing boom? The answer, as always, is cheap money and government stimulus. The Bank of England reduced interest rates to emergency levels in 2008/09, in response to the financial crisis of that time. While the economy quickly recovered, interest rates were kept at a 400-year low and remained there for a decade. When another crisis struck last year, the Bank of England acted quickly to reduce rates to an even lower emergency low, this time 0.1 per cent. Once again, the economy has recovered well, and yet interest rates remain at their historic low. Moreover, in the intervening years we have had bungs handed out to homebuyers, with the government agreeing to underwrite mortgages which the banks would not. Hence demand has been stimulated — yet supply of housing has been constrained by the closure of building sites during the lockdowns and a shortage of construction workers to build new homes.
It isn’t just the low-debt servicing costs: investors have worked out that the government will always bail out the housing market.