Bank of England ‘a spectator’ as London housing market surges


London house prices are being driven beyond the Bank of England’s control by cash-rich foreign investors seeking top-end property in the capital.

Speaking on yesterday’s Andrew Marr show, Bank governor Mark Carney said the government’s Help to Buy scheme is having a minimal effect on the surging London market.

Instead, he said, the property surge is being driven by the continuing influx of foreign buyers whose cash purchases avoid the Bank’s influence, rendering it a spectator that can merely “watch” as prices rise.

Mr Carney said: “Much of what’s driven in London … is not mortgage-driven, it’s cash-driven. The top end of London is driven by cash buyers. It’s driven in many cases by foreign buyers.

“We, as a central bank, can’t influence that. We change underwriting standards, it doesn’t matter, it’s not a mortgage. We change interest rates, it doesn’t matter, it’s not a mortgage.”

However, Mr Carney went on to describe the surge in prices as an “adjustment” from their post-crash low, but which still remain below their 2008 peach. “They’ve now bounced back but they’re still more than 25% below historic averages, let alone stronger than historic averages,” he said.

His comments were at odds with figures released last week by Shelter, which suggested that the affordability of home-ownership is becoming an increasing problem.

Based on wage and house inflation figures collated from each area of the country since 1997, the homelessness charity claimed average earners would need to see their annual salaries double to match the rise in house prices.

And it highlighted Hackney as an area where property values had become completely detached from wages, claiming that the average salary across the borough would need to rise by £100,000 to remain in line with the “astronomical increase” in local house prices.

The charity added: “Worryingly, there is not a single area in the whole country where wage and house price inflation have remained aligned. Burnley has the smallest gap, but here £10,000 would still need to be added to the average salary to put it in line with the rise in house prices.

“The impact of the housing shortage has been widespread, with the latest Census showing a drop in home ownership in England for the first time since records began.”

Shelter chief executive Campbell Robb added: “It is no surprise that the dream of a home of their own is slipping further out of reach for a generation.

“Politicians need to start meeting people halfway by committing to bold solutions that will get more affordable homes built. Otherwise future generations will find themselves priced out of a stable home, however hard they work or save.

“The only solution is to build more affordable homes.”

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Chancellor backs building drive to fix ‘historic’ housing shortage


UK property prices rose by 7.3% in the year to January, according the latest Halifax house price index figures, chiming with other reports that reflect a widespread property boom.

The Halifax index revealed that house prices resumed their upward path last month, recording a 1.1% increase, following December’s month-on-month fall of 0.5%.

And though the slightly older Office for National Statistics (ONS) figures suggest a smaller nationwide rise – at 5.4% in the year to November – they do confirm the near-stratospheric boom in London compared with the rest of the country, with a rise in the capital of 11.6%.

But while the lack of housing supply relative to demand has become a common theme, there are differences over how the current boom will play out. On the one hand, the Halifax believes household debt will be a constant drag on prices, while chancellor George Osborne believes the boom could last for more than a decade.

Announcing the index figures, Halifax housing economist Martin Ellis said: “With the supply of properties being slow to respond to more buoyant market conditions, stronger demand has resulted in continued upward pressure on house prices.

“Demand has increased against a background of low interest rates and higher consumer confidence, underpinned by signs that the economy is recovering and unemployment falling faster than expected.

“However, continuing pressures on household finances, as earnings fail to keep pace with consumer price inflation, are expected to remain a constraint on the rate of growth of house prices.”

The Halifax figures were released the day after chancellor George Osborne gave evidence to the Lords Economic Affairs Committee. He said: “This is a big challenge for our country. We have got to build more homes.”

Mr Osborne said the Coalition government’s relaxation of planning regulations would, over time, go some way to easing the problem, by stepping up the construction of new homes. “The planning reforms are clearly working,” he said. “You see planning applications up, planning approvals up, and the percentage of planning approvals up.

“Across the board, we are pulling a lot of levers. But this is a historic problem.”

The chancellor, meanwhile, was keen to defend the Help to Buy Scheme which, by underwriting large loans to people without deposits, has attracted criticism for inflating a housing bubble in London and the South East.

Instead, Mr Osborne pointed to the fact that house prices are still well below their 2007 peak, and added that the Bank of England is monitoring the position closely, and has sufficient powers to cool the market if necessary.

Though the ONS House Price Index to November shows a more sedate rise in house prices across the country, they do highlight how London is a different housing market planet compared with the UK as a whole. According to the ONS, Wales saw the second-highest rise, at 5.4%, while the South East saw prices rise by a comparatively modest 4.5%.

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UK base rates held at 0.5%

Mark Carney: interest rate conundrum

Mark Carney: interest rate conundrum

In a move that surprised absolutely no one, the Bank of England has announced today that its base rate is staying at 0.5%.

This follows the nine-man Monetary Policy Committee’s (MPC) earlier vote to keep rates at this never-before low for the 60th consecutive month.

But the perceived need for continued market stimulus is creating a difficult presentational balancing act for the Bank’s Canadian governor, who is keen to reassure households and businesses that a rate hike is not as close as they might fear.

Mr Carney’s move follows a fall in January’s recorded unemployment levels to 7.1%, just a whisker above the 7% he said would trigger a rate re-evaluation. If the UK economy does grow faster than last year’s 1.9%, the pressure to raise base rates will intensify, potentially spelling trouble for millions of homeowners. Many commentators see UK rates rising to nearer 3% within two years.

In his ‘forward guidance’, issued last summer after succeeding Sir Mervyn King in the job, Mr Carney said unemployment was unlikely to reach the 7% mark before 2016. In other words, he believed there was little prospect of rate rises until safely after next year’s general election.

However, this issue could pose a challenge to his credibility because UK unemployment has declined must faster than expected, and looks set to fall below 7% within months, if not sooner.

Speaking at last month’s World Economic Forum in Davos, Mr Carney reaffirmed his view that rates should stay put for some time, a position apparently not shared by all of his fellow MPC members. So, having nailed his colours to the ultra-low interest rates mast, he could face the risk of being outvoted by his MPC colleagues, who are increasingly thought to favour rises.

Many market analysts believe it would be sensible for Mr Carney to announce a cut in his unemployment trigger point to 6.5% when delivering his inflation report next month. However, even if rates do rise, the view is growing that any increases across developed economies like the UK will be minimal, restrained by the chronic and still-rising levels of public, corporate and household debt.

This argument was taken up by former US Treasury secretary Larry Summers in November. He said interest rates will have to stay negative – between to 2% to 3% below inflation – for many years as a stimulus to offset the deflationary effect of debt. But with inflation at barely 2%, the scope to do this is limited, removing many of the levers of traditional macroeconomic theory.

So, wherever Mr Carney’s interest rate balancing act takes him, it will very likely be closely watched by homeowners, who have their own balancing act to perform.

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Weak, unbalanced recovery gives hard-pressed homeowners interest rate reprieve


UK interest rates look set to stay at their historically low level, thanks to worse-than-expected growth figures released yesterday by the Office for National Statistics.

While chancellor George Osborne was pleased with the 0.7% rise in gross domestic product (GDP) during the last quarter of 2013, it still fell short of the 0.9% forecast by the Bank of England’s Monetary Policy Committee (MPC).

Not only that, but the growth rate also slowed from the 0.8% the previous quarter which, taken together, means the swelling numbers of MPC members who support an interest rate hike will probably hold fire for the time being.

Of course, you wouldn’t have believed the recovery was still so anaemic given the rapturous headlines the ONS figures have provoked. With a general election due in May 2015, the government will accept any good news at all. So, the fact that the UK economy grew by 1.9% last year fits the bill nicely. For now.

“These numbers are a boost for the economic security of hard-working people,” said a bullish Osborne. “It is more evidence that our long-term economic plan is working.

“But the job is not done, and it is clear that the biggest risk now to the recovery would be abandoning the plan that’s delivering jobs and a brighter economic future.”

Bank of England interest rates have been held at the never-before low of 0.5% since March 2009, when the British economy slipped into the deepest recession for a generation following the global financial meltdown. Signs of recovery, plus a string of upgraded growth forecasts, had led some MPC members to support a rate rise.

However, growth poses as many problems for householders as it does low or no growth, because of the high levels of personal indebtedness. Many homeowners are only able to make their mortgage payments because interest rates are so artificially low. As soon as interest rates start to rise, which they inevitably will as growth takes hold, an estimated 1.2m homeowners could find themselves unable to cope. Many economists expect rates to be nearer 3% two years from now.

What’s more, growth is being supported by a range of extraordinary measures. In addition to ultra-low interest rates, the economy has been primed by £375bn of quantitative easing money, the £70bn Funding for Lending initiative and the Help to Buy scheme. Given the enormous stimulus, growth of 1.9% is fairly modest.

Though ONS chief economist Joe Grice said “we’ve seen growth in most parts of the economy”, various market analysts have voiced concerns for some time that this is an ‘unbalanced’ recovery that is over-reliant on housing market activity, as well as the service sector and consumer spending.

Speaking of growth figures released in November, for instance, Scotiabank economist Alan Clarke told Bloomberg: “Under the surface, the breakdown was not particularly pleasing. Most of the heavy lifting is coming from the consumer and stock building. That is not a great long-term prospect for growth.”

The government’s Help to Buy scheme, which has so far helped 13,000 homeowners obtain loans, underwrites loans for people who would otherwise not qualify. These loans are interest-free for the first nine months, and have helped first-time buyers to drive an 8.8% surge in house prices over the last 12 months.

However, while the ONS reports the strongest growth levels since the credit crunch took hold in late 2007, economic output is still 1.3% below its 2008 peak – dragged down by falling North Sea oil and gas production – in the most sluggish recovery from recession in 40 years. Business investment also remains depressed: last year, capital investment fell to its lowest level since the ONS dataset began in 1997.

So it’s probably best to keep the Champagne on ice, at least for now. Unbalanced growth and the UK’s personal debt mountain will have a big say over exactly where the recovery goes from here.

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The Lobbying Bill: A chilling, anti-democratic gagging law

Disappointed: 38 Degrees executive director

Disappointed: 38 Degrees executive director

As leader of the opposition, David Cameron said the shady world of political lobbying was in desperate need of reform and that politics needed to be ‘cleaned up’. Lobbying, he suggested, was a major scandal waiting to happen.

He even sounded quite progressive, emphasising the importance of transparency. He even suggested that vested interests should not be able to influence the political process from behind a veil of secrecy.

Well, after four years in power, many believe his Coalition government’s actions speak a very different language, particularly with reference to the word ‘transparency’. And especially now the rather sexily-entitled Transparency of Lobbying, Non-Party Campaigning & Trade Union Administration Bill went before MPs again last night, having completed its final passage in the Lords on Monday.

The bill makes it an offence for a consultant to lobby, except in certain circumstances, without first registering as a consultant lobbyist. It also introduces changes to the use of trades union membership lists, and cuts the money ‘third parties’ can spend in support of a party or candidate, as well as on election materials.

The suspicion is that the bill is being hurried through Parliament so that the weight of restrictions on debate can be enforced on Government critics in time for the 2015 general election.

Shadow leader of the House, Labour’s Angela Eagle, said the legislation “seeks to silence critics of the government in the run-up to the general election, while letting vested interests operate out of sight” and was “an object lesson in how not to legislate”.

The Electoral Commission and a coalition of charities, many of which united behind a campaign by 38 Degrees, feared a wide range of organisations would fall within the definition of a ‘third party’.

Indeed, the legislation would introduce controls which are, according to the NCVO, “likely to impose extensive and expensive audit and recording requirements on charities and community groups in relation to a wide range of activities. Charities may even have to account to the Electoral Commission for volunteers’ time.”

The NCVO approached Helen Mountfield QC for legal advice. She said that the bill was “likely to impose substantial new regulatory hurdles in relation to what they can say and restrictions on their ability to comment on matters of public interest for very substantial periods of time.

“The lack of clarity as to the extent of the controls, coupled with the criminal sanctions for non-compliance, mean that the provisions of the bill are likely to have a chilling effect on the expression of views on matters of public interest by third sector organisations.”

Many of the restrictions outlined in the bill apply during a ‘relevant period’, but its definition is not straightforward. “It may not always be possible to predict whether a ‘relevant period’ has started in advance, before it has begun.”

The Lords had amended the bill at its last reading, but the vast majority of Coalition MPs lined up to strike those amendments out, instead voted to:

  • remove new rules that limit secret lobbying by big business, and
  • restore limits on what ‘non-politicians’ – campaigners, charities and voluntary groups – can say on issues of the day.

Expressing disappointment with the result, 38 Degrees executive director David Babbs said the vote was tight and, therefore, encouraged opponents of this “gagging law” to begin a fresh campaign.

He said: “It’s pretty depressing. But it’s not over. The House of Lords will now get another vote – probably next week. They have the option to refuse to back down and force MPs to vote yet again.

“Today, there’s lots to feel fed up about. Yet again we’ve seen MPs push through a law which the public have never voted for, and which has been heavily criticised by everyone from the United Nations to the Citizens Advice Bureau, the Women’s Institute to the Royal British Legion.

“A number of government MPs did rebel. If 17 more had voted differently, we would have won. Maybe we can get some more to change their minds next time around.

“Hopefully we can all agree on one thing, though. This definitely isn’t the time to give up. The kind of issues that 38 Degrees members choose to campaign on – like protecting the NHS, preserving our countryside, improving democracy and challenging tax dodging – are way too important to leave to politicians.”

Details of how each MP voted will be posted on the 38 Degrees website shortly, and its supporters are encouraged to ‘join the conversation’ on its Facebook site.

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