Ross Clark

Will inflation cause a house price crash?

  • From Spectator Life
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Just what would finally bring the seemingly endless boom in house prices to a halt? A global banking crisis which resulted in the collapse of several large institutions plus others having to be bailed out by the government? A pandemic which cost the lives of over 100,000 people in Britain, led to the enforced closure of most shops and contracted the UK economy by nearly 20 per cent in a year?

Had you raised either scenario when the market was racing ahead in the mid-2000s there would have been a general assumption that yes, either would have been fatal, leading to a house price crash. Sure enough, the first of these – the 2008/09 banking crisis – did lead to a sharp fall in prices, albeit one which was rapidly reversed in London and the South East. But the second? The idea that a pandemic can have sparked a housing boom would have seemed absolutely mad.

That is to forget, however, what has really been driving the housing market for the past three decades: cheap money. Interest rates have been on a long downward trend for all the time that the market has been rising. To understand how prices have become so high you have to look not at prices themselves, nor their ratio to annual earnings but to the cost of servicing a mortgage. On that metric, prices are really no higher than they were three decades ago – if prices have more than quadrupled in many cases, that has to be set against mortgage rates plunging by three quarters.

We have had a 30 year property boom because we have not had a prolonged period of rising interest rates in all that time. The pandemic sparked a resurgence in prices because the Bank of England slashed its base rate as an emergency measure – that and because the Chancellor introduced a stamp duty holiday, the time-limited nature of which sparked people to rush and try to beat the deadline.

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