Policymakers Should Focus On The Facts, Not Premature Talk About A House Price Bubble
Data released by the Office for National Statistics (ONS) today showed that the annual rate of consumer price index (CPI) inflation fell marginally from 2.8% in July to 2.7% in August. The largest contributions to the fall in the rate came from the transport (particularly motor fuels and air transport) and clothing sectors. These were partially offset by an upward contribution from furniture, household equipment & maintenance.
Going forward, we expect inflation to fall back at the end of 2013 and into 2014, reaching close to the Bank of England's central target. Cooling global commodity prices should provide respite to UK households and curb price growth, helping to abate ongoing cost of living pressures. Last year's tuition fee hike should also drop out of the annual rate of inflation from October, pushing down overall price growth. However, with annual earnings growth languishing below the 2% mark, where we expect it to remain until 2015, households will still be seeing their spending power eroded for some time.
Other ONS data released today showed the housing market continuing to recover, supported by schemes such as Help to Buy and Funding for Lending. Average house prices in July were 3.3% higher than the same month a year ago, up from 3.1% annual growth in the 12 months to June. House price growth continues to be driven heavily by London, where prices rose by 9.7% over the 12 months to July. If London is excluded, then house price growth in the UK was a much more modest 1.3%. If the South East is excluded too, house price growth was just 0.8%.
There is much talk of a house price bubble at present but this seems an exaggeration and a very London-centric view of the UK housing market. Clearly the London property market is shooting ahead, but elsewhere in the UK house price growth is just over 1%. Bank of England data show the number of approvals for house purchase remains close to half typical pre-financial crisis levels - again somewhat at odds with the idea that the housing market is overheating. Talk of a housing bubble makes for nice headlines, but unfortunately it could lead to incoherent policy announcements - with government trying to encourage homeownership with one hand and trying to tighten access to mortgages with another. This could at best be confusing, and at worst economically detrimental.