Home Blogs Chemicals and the Economy UK house prices slip in H2

UK house prices slip in H2

Chemical companies, Consumer demand, Economic growth
By Paul Hodges on 15-Feb-2011

UK housingFeb11.pngUK housing markets followed the US lead in recent decades. Conservative and Labour governments both shared a belief in extending property ownership as widely as possible. But what neither foresaw was the ‘unintended consequence’.

Their policy of boosting home ownership coincided with the entry of the BabyBoom generation (those born between 1946-70) into the 25 – 54 age group. This is the period when people normally settle down, marry, and have children. And UK births had risen 15% over the period versus the previous 25 years, making it the largest generation in UK history.

Naturally, they responded enthusiastically as successive governments promoted the concept of home ownership. They particularly liked the fact that any gain on the sale of one’s main residence was completely free of tax. Thus rising home ownership led to the rise of the ‘wealth effect’.

House prices rose dramatically as the Boomers married and settled down, allowing them to re-mortgage and extract equity. And as in the USA, they used this extra cash to buy exactly those items most linked to chemical and polymer consumption – new cars, new kitchens and new bathrooms.

Of course, this pattern should have ended with the dotcom downturn in the early 2000s. But unfortunately in the UK, as in the USA, the central bank believed it was a master of the universe. Thus as the Governor of the Bank of England told Parliament in March 2007:

“Confronted with what we saw we knew that we had to stimulate consumer spending. That pushed up house prices and increased household debt. That problem has been a legacy to my successors; they have to sort it out.”

Sadly, this “legacy” is now finally beginning to be sorted out. Home prices, like consumer spending, were supported during 2009-10 by record low interest rates, which meant homeowners on variable mortgages (the vast majority) had a major boost to their discretionary income.

But now, as the above chart from the UK Land Registry shows, prices seem to have begun to fall again. And Justice Secretary Ken Clarke, a successful Finance Minister in the 1990’s, warned at the weekend that “I don’t think Middle England has quite taken on board the scale of the problem that will emerge as the (government’s) cuts start coming home.”