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What’s really fuelling George Osborne’s ‘economic recovery’?

From an blog originally published on City Economist.

It is estimated that current housing supply levels will mean that London will have a deficit of 559,000 homes by 2021 – which even when excluding factors such as overcrowding still amounts to 329,000 fewer homes than London will require. So what we have behind this economic recovery is really a credit-fuelled boom in existing real estate. The government’s Help to Buy scheme is allowing investors as well as expectant homeowners to get a mortgage and a deposit. As I suggested in a recent post this poses a danger of another housing bust as the Bank of England’s (BoE) house price index indicates.

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As the BoE has pointed out,  low- to middle-income households are badly exposed if mortgage rates were to rise. Nearly a third of mortgage debt is held by households that have borrowed more than four times their income; and a sixth of it is held by those who have less than £200 a month left after spending on essentials.

The BoE wants to start raising interest rates as soon as the unemployment rate falls below 7% and we are told that will now happen in 2015.  If the BoE actually implemented this hike in rates, the whole property house of cards could start to tumble and bring the UK economy down with it.  The government will no doubt hope that would be after the next election, which will be no later than in May 2015.  But if the current rate of decline in unemployment continues, that 7% threshold will be reached in 2014 not 2015.  So it is more likely that the BoE will not start to normalise rates then after all.  So the credit boom will be allowed to continue.

 

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