Leading article

George Osborne has made his own 'dangerous cocktail' of economic risk

For as long as the era of cheap credit lasts, house prices will remain sky high

9 January 2016

9:00 AM

9 January 2016

9:00 AM

When David Cameron said this week that he is worried his children would not be able to afford to buy their own homes, he struck on one of the greatest economic problems of his premiership. The old British promise is that if you work hard and make the right decisions, you can advance in life and own your own home. This is the ladder that most aspire to climb. But for an entire generation, even the hope of home ownership is slipping out of view. A huge number of young Britons cannot hope to have the kind of life their parents enjoyed.

The Prime Minister must know he is on dangerous ground here. His own children, of course, will not have to worry — just as he did not have to worry. A fat handout from the Bank of Mum and Dad will be available to help the young Camerons raise a deposit for their first homes. It is people who hail from families with resources of rather less than the Camerons’ estimated £30 million who face being frozen out of the housing market for life. Or at least for as long as the era of rock-bottom interest rates lasts.

When George Osborne spoke about a “dangerous cocktail” of risk, he blamed everyone but himself: Korean missiles, spluttering Chinese growth, a choking European recovery. In fact, the biggest risk is that the Chancellor has built his recovery on a mountain of debt. It’s very cheap debt, to be sure, but he has increased the national debt burden more in five years than Labour did over 13 years. Nailing interest rates to the floor pours more vodka into the economic punch bowl: with every pound he borrows, the Chancellor fortifies his own ‘dangerous cocktail’. This creates all kinds of risks in an economy, and all kinds of crazy side effects. One of them is sky high property prices.

Just as last time, we have learnt not to recognise the side effects of cheap debt. We like to blame all kinds of people for high house prices: immigrants (and their children) who add to the population faster than houses can be built for them. The rich foreigners who buy up apartments in London, jacking up the prices of property across the south-east of England. Ed Miliband tried denouncing housing companies and landlords as ‘predators’. Then there’s the councils who refuse planning permission. Yet perhaps the greatest single factor is one that no one seems willing to acknowledge: the curse of low rates.

Britain is now well into a healthy economic recovery — the strongest in Europe — and still the Bank of England’s base rate wallows at an emergency 0.5 per cent. The cost of mortgages has also collapsed. Before the crash, the average rate for a 75 per cent mortgage was 6 per cent; now it is under 2 per cent. The maths is not difficult. The cost of borrowing is a third of what it was, so people can afford to borrow three times what they once did, on the same monthly repayment. Asset prices rise accordingly. We have been witnessing the era of low credit forcing house prices up by an extraordinary amount — to the delight of those who already owned expensive property, and to the dismay of those who do not.

This has been an extraordinary windfall to those who owned expensive houses in the first place. George Osborne’s six-bedroom house has risen in value by about £2 million since he bought it ten years ago. Ed Miliband has ended up owning one of the ‘mansions’ he wanted to tax. He bought his two–kitchened house for £1.6 million seven years ago. It’s now worth more than £2.5 million. The boom is not restricted to housing: the era of cheap credit has sent the value of all kinds of rare assets through the roof. During the crash, a vintage Ferrari 250 could be bought for £1.2 million: they now sell for about £10 million.

Rather than address the asset bubble, Cameron’s government has helped to inflate it further. With George Osborne’s Help to Buy scheme, the government is making mortgages artificially cheap in the same way that George W. Bush’s administration did when creating the great sub-prime mortgage disaster. It is as if nothing has been learned from that crash. The Prime Minister’s initiative this week has a little more to be said for it. Granting planning permission for 13,000 new homes on surplus public land is welcome, but some 240,000 are needed each year just to keep pace with population growth.

As Communities Secretary Greg Clark observed this week, 90 per cent of people consistently say that they would like to own their own home. The gap between this group and the 63 per cent who actually do own their own home represents a vast natural constituency for the Conservatives, and one whose interests they are failing to serve. They should do this by stabilising the market, not rigging the market.

For as long as the era of cheap credit continues, asset prices will remain sky-high — representing a grave injustice to young people who wish to make the same journey through life as their parents. Once, the Conservatives spoke about the danger of treating cheap debt as a horn of plenty. Now, Osborne is presiding over a recovery that is expected to see household debt ratios rise to where they were before the crash.

And the Bank of England? Osborne talks about rate rises being inevitable but the rise envisaged is barely worthy of the name. The Bank is expected to raise rates at a glacial speed — to just 1.75 per cent by the end of the decade. At this rate, it would take half a century for things to get back to normal.

The British economic recovery will not be complete until interest rates are back to their historical average. Until that happens, we cannot expect houses to return to an affordable rate – and nor will we be able to tell how much of the recovery is real and how much of it is still a debt-fuelled illusion. Britain is, still, increasing debt this year faster than almost any other country in Europe. For all his rhetoric, the Chancellor has not broken his debt addiction – and he is quite right to worry about the consequences.

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  • Hayekian

    It’s almost like you are saying that printing enormous amounts of money to manipulate interest rates causes inflation (though luckily mainly in assets that are outside of the inflation basket and superfluous to most people’s everyday needs like housing). I’m sure the politicians would assure me that the pound in my pocket isn’t worth any less though.

  • alabenn

    Straight away you devalue the whole article with the line, G.W Bush creating the sub prime mortgage disaster, Clinton initiated it with his, houses for black votes, but still lets not let actual events get in the way.
    Why should interest rates not stay low, high interest rates did more to create the sub prime mortgage disaster than the Bush years, it was high interest rates which swamped the market with millions of houses as banks called in loans to people who should never of had one in the first place.
    High interest rates encourage people to hoard their money, low interest rates will, after the low hanging fruit like BTL has been removed will force people to find other ways of making their money work, tax unearned interest and grant tax exemptions to new investments in industrial and service industries.

    • Dr Strangelove

      Of course it was politicians fault, and the identity of culprits entirely dependent o the political persuasion of the judge. Ot course it’s nothing to do with cynical bankers, and gullible house purchasers.

  • Andrew Phillips

    Unaffordable property prices are the price of economic growth.. look at Hong Kong, an economy we’ve described as booming for the last decade – you think London property is expensive? Think again! Entire families have to share small apartments there by necessity.

    Since the economy was previously flatlining, it’s now growth at all costs – it’s growth or collapse. So I can’t see the property situation changing for a long time..

    And interest rates? Check out Japans interest rate history, I expect our future to be similar.

    Good time to get on the property ladder if you can scrape the deposit

    • majestic whine

      Yeah take a look at the bubble stats that RICS just posted. HK is affordable compared to our ‘economic miracle’

    • Pedro the exile

      “And interest rates? Check out Japans interest rate history, I expect our future to be similar.
      Good time to get on the property ladder if you can scrape the deposit”
      You might be right about the interest rate trajectory but if your Japan analogy is correct then you really, really don’t want to be long real estate-central Tokyo is still below where it was 20+ years ago as the previous asset bubble is still deflating-sound familiar!!!

  • David Bale

    Recovery in This Country and Balancing The Books again will never occur – Until This Nonsensical Government revitalises our Industrial Heritage – Creates a Growing and Developing Skilled Jobs Market and enables The Creation of Income to pay our way !

    It is nonsensical to see our Industries closing daily – Our Workers on a pitiful minimum wage structure – Our Borrowing increasing Daily and expect to pay our way – This is rubbish !
    Consider This :- We have NO Coal Mining – Steelworks – North Sea Oil/Gas – Bulk British Owned Car Manufacturers – A Dying Farming/Agricultre – A Dying NHS – A Dying Chemical Industry – NO Thriving Dockyards/Ship Building etc.etc.etc – WE IMPORT – Food – Milk – Coal – Energy !!!

    Just Where is The Finance to come from then to PAY OUR WAY !!

    It seems that we would rather look after everybody else rather than our own – which is shameful !

    It’s time Somebody Somewhere woke-up !!!

  • majestic whine

    If even the Spectator is pointing this out then they must be on very shaky ground.

  • mombers

    No mention of reigning in rampant rental inflation though? The worst value rents in the world force many people to buy as soon as they possibly can to avoid having what is effectively a privately collected tax docked every month. Where rents are kept under control, people can make decisions like moving to a different city for work or not buying a house with spare bedrooms for a family that is many years in the future. I rented until I was settled and had my kids into a school that I could only afford t rent my way into, and just barely managed to buy before the last Tory market rigging. Despite being in the top 95% of household income, we could never buy now.