It is hard to avoid the press headlines about an overheating housing market in the UK. The latest data from Nationwide says that prices were up 10.9% in the year to April, the first time double digit growth has been recorded in four years. However, as the graph above shows, the focus on the last 12 months means that the bigger picture is ignored:
- Average UK house prices have changed less than 1.5% over the last seven years. The average price in the first quarter of this year was £178,124 against £175,554 in Q1 2007.
- The fall in house prices from their peak in the third quarter of 2007 to the first quarter of 2009 was, with the exception of Northern Ireland, quite similar across the UK.
- The recovery since 2009 has been most marked in London, as shown by the widening gap between the green and blue lines. London has dragged up the overall UK figure as in the regions away from the south of England, house prices remain below their 2007 peak levels. Northern Ireland has been particularly hard hit, with house prices at less than 60% of their 2007 levels.
- None of these numbers take any account of inflation, which over the past seven years (to April 2014) has amounted to 24.5% (RPI) and 22.6% (CPI).
The government has been accused of pushing up house prices through its Help to Buy scheme, designed to assist homebuyers with small deposits. However, Mr Cameron has made clear that the task of controlling the property market rests with the Bank of England and, in particular, with its relatively new Financial Policy Committee (FPC). The indications are that the FPC will tighten mortgage lending by ‘macroeconomic’ measures, such as requiring mortgage lenders to hold more capital against property loans or capping loan/income or loan/value ratios. It is possible the FPC could also ask the Government to reduce the £600,000 ceiling on Help to Buy purchases, although the most recent evidence suggests this is not driving the London-centric price rises.
The Bank does not want to use a rise in interest rates as its first line of defence on rising property prices, as it still wants to keep rates unchanged for about another year. Whether it can maintain that stance is the subject of some debate: the contents of the FPC’s macroeconomic toolkit are untried in recent times.