Bank of England boosts UK house prices as foreign buyers flood into central London

Consumer demand

SHARE THIS STORY

UK houses Aug13Last week saw new Bank of England governor, Mark Carney, follow the lead of US Fed Chairman Ben Bernanke on trying to deliver a ‘quick fix’ for the economy by boosting asset prices – particularly house prices and stock market levels.

But as the Bank of England chart shows, this means trying to return the ratio of house prices to earnings back to the levels seen in the bubble of 2003-2007.  And we all know how that ended, with the near-collapse of the UK financial system:

  • The ratio of house prices to earnings is the basic measure of affordability
  • During the 1990s, it averaged around 4x, meaning the average price was 4 times average earnings
  • It then doubled to 8x during the bubble period, as central banks cut interest rates
  • The 2008 Crisis saw the ratio fall to 7x
  • But new government support means prices have since avoided the major declines seen elsewhere

Obviously this is good news for existing homeowners.  But they are mainly older people, who are entering their low-spending years, and so their increased wealth is unlikely to stimulate much new consumer spending.  Whilst younger people will have to pay more to buy a home.  Today’s average price (£167k -$260k) is already 75% higher in real terms (adjusted for inflation) than during the 1990s according to Nationwide.

Consumer spending is 60% of UK GDP.  So today’s high prices mean that younger people will have less money to spend on the discretionary products that drive consumer spending and chemical demand.  So the policy will actually reduce overall economic growth rather than increase it.  In addition, Carney’s attempt to further expand the house price bubble is already driving up interest rates – and so negating his promise last week to keep rates low.

A further concern is that today’s bubble is increasingly being driven (as in the US) by speculative money seeking to buy homes for rental purposes.  Whilst average prices would probably already be much lower without the flood of money into central London housing from Asia, the Eurozone, Eastern Europe and the Middle East.  Latest data, for example, shows nearly 75% of all new homes in central London were sold to foreign buyers in 2012.

As leading investor, and former EPCA speaker, Mark Faber has noted, one clear sign of a bubble top is when “condominium prices reach prices that exceed the purchasing power of the locals and are now advertised overseas”.

In the end, Carney and other Western policymakers will have to learn the lesson spelt out by former Bank of Japan governor, Masaaki Shirakawa, when he took office in 2008.  He warned that fiscal stimulus and low interest rates make little difference over the longer-term, with Japan’s property prices falling a cumulative 60-80% as its bubble unwound post-1989.

Shirakawa’s uncomfortable lesson from Japan was that despite the hope of policymakers such as Carney and Bernanke, “the economy will have to grind out the excesses – high house prices and unsustainable household debt – that inflated the bubble in the first place”.

PREVIOUS POST

US PE exports up just 11% versus 2011, as focus shifts to Latin America

15/08/2013

H1 trade date from leading provider Global Trade Information Services highlights...

Learn more
NEXT POST

Demographics has "frightening implications" for the economy

19/08/2013

The blog first wrote about the potential impact on GDP growth of changing demog...

Learn more
More posts
Plastics producers need to move to recycled feedstocks as Western refineries start to close
21/11/2021

Plastics producers are now being squeezed from both ends of the value chain. Upstream, the growing d...

Read
Smartphone sales decline highlights need to move to a more service-based business model
07/11/2021

Global smartphone sales took a hit in Q3, disappointing those who had hoped the economy might be mov...

Read
PlasticsEurope calls for mandatory 30% recycling target for packaging by 2030
12/09/2021

The European plastics industry last week took the crucial first step in moving away from virgin plas...

Read
Samsung stumbles in global smartphone market as Xiaomi overtakes Apple
08/08/2021

Smartphone sales confirm that global markets are continuing to pivot to the New Normal world. Back i...

Read
Brand-owners start to focus on renewable carbon
13/06/2021

The original debate on plastics recycling owed its prominence to Ellen MacArthur, the yachtswoman wh...

Read
“One size no longer fits all” as the global smartphone market breaks down into different segments
30/05/2021

The pandemic was very good news for some companies, with demand for online activities rocketing. But...

Read
Biden’s Earth Day Summit puts plastics recycling on the fast track
25/04/2021

Plastics has long been the ‘odd one out’ in terms of recycling. Steel, aluminium, glass,...

Read
Americans hunker down on spending as the pandemic’s impact continues
11/04/2021

US stock markets have been hitting new records recently, as investors swoon over the idea that the $...

Read

Market Intelligence

ICIS provides market intelligence that help businesses in the energy, petrochemical and fertilizer industries.

Learn more

Analytics

Across the globe, ICIS consultants provide detailed analysis and forecasting for the petrochemical, energy and fertilizer markets.

Learn more

Specialist Services

Find out more about how our specialist consulting services, events, conferences and training courses can help your teams.

Learn more

ICIS Insight

From our news service to our thought-leadership content, ICIS experts bring you the latest news and insight, when you need it.

Learn more