Bank’s chief economist on alert for property dip

THE Bank of England’s chief economist has warned that Britain is at risk of a prolonged bout of inflation amid fears the country’s property boom is about to come to a halt.

Huw Pill does not expect interest rate rises to crash the housing market, but that there would be “moderating effects” on prices and Threadneedle Street is on alert about the danger of a jump in households’ mortgage costs.

He said: “This is an issue we will need to monitor very carefully.”

Speaking a day after Bank forecasts suggested that the UK is on the cusp of a recession, Mr Pill said he expects the economy to stagnate during the second quarter and begin shrinking at the end of the year.

His comments came as Halifax warned runaway growth in house prices has started to slow.

Repossessions are expected to surge as borrowers struggle to afford

‘There is a risk that inflation becomes more self-sustaining – something we have to guard against’

higher mortgage payments, experts have warned, with almost 4,000 people at risk of losing their home by the end of July according to the CEBR think tank.

House prices continued to increase sharply last month, but April could be the final one of high growth, Halifax said. The average home cost £286,079 in March, rising 10.8pc over the past year.

Russell Galley, Halifax’s managing director, said: “The house price to income ratio is already at its highest ever level, and with interest rates on the rise and inflation further squeezing household budgets, it remains likely that the rate of house price growth will slow by the end of this year.”

The Bank warned on Thursday that inflation will surge to more than 10pc this year, its highest level since 1982, and that growth will be stagnant for the next two years.

Despite the Bank’s dire forecasts, Mr Pill rejected comparisons with the “stagflation” of the 1970s – saying “we are not headed in that direction” – but warned rising wages risked entrenching price increases.

However, he added: “There is a risk that inflation becomes more self-sustaining – and that is something we have to guard against.”

If Margaret Thatcher was right that a properly functioning housing market is key to turning socialists into capitalists, then it surely follows that the opposite is true.

In which case, ministers should be on red alert because it is increasingly obvious that the property-owning democracy that Thatcher envisaged is little more than a mirage for many Brits.

Her “Right to Buy” revolution was a success given that ownership rocketed in the 20 years that followed. But it peaked at the turn of the millennium and slammed into reverse, giving rise to the depressing phenomenon that was “Generation Rent”.

After two decades of soaring prices, the dream of home ownership risks being nothing more than that for an entire generation of young people, which is why warnings of an end to the property market boom should be cautiously welcomed.

The Bank of England’s decision to lift rates for the fourth time since December, together with its doomladen economic forecasts, have left lenders and estate agents quivering, with one top chain shocked into calling the top of the market.

“We appear to have reached the summit,” Tom Bill, analyst at Knight Frank said, citing the “psychological impact” of the Bank of England base rate hitting 1pc.

At first glance, the housing market looks like it remains in rude health. The average price of a home rose 1.1pc in April to £286,079, according to Halifax, a new record high and the 10th consecutive month of growth.

However, on an annualised basis, growth slipped to 10.8pc, compared with 11.1pc the previous month, prompting the building society to predict a slowdown by the end of the year as the pressures of rising rates and the cost of living squeeze bite.

Tomer Aboody, director of property lender MT Finance, forecasts an “imminent slowdown”.

That seems like a perfectly sensible bet. The housing market has long defied gravity, but it seems unlikely that it can survive the economic storm that Bank of England Governor has warned is brewing.

A full-scale crash is obviously not in anyone’s interests, apart from City speculators that have been shorting the shares of the top housebuilders, or indeed the banks that have propped up the housing market up with dirt-cheap mortgages. Defaults and repossessions would go through the roof.

The well-off could probably withstand a prolonged period of negative equity providing they have no plans to move home, but past crashes have produced losers everywhere.

Anyone young that has just got onto the ladder at peak prices would be staring financial oblivion in the face.

Worse, couples would find themselves trapped in box-cutter houses fit perhaps for a first baby but beyond that not big enough to have a larger family. It is not impossible to imagine Britain experiencing something akin to a baby bust where an entire generation is unable to have more children, or any at all, because their homes don’t allow for it.

The regions would suffer disproportionately too, along with those having to sell-up to fund social care in old age, experts warn.

But a steadier correction would undoubtedly be good for Britain. The gap between prices and household incomes has surged to record levels, locking millions of young families out of the property market.

Successive governments must shoulder the bulk of the blame. The Conservatives’ flagship Help-to-buy scheme introduced by George Osborne has been a disaster for prices, but a goldmine for housebuilders.

A recent House of Lords report found that the scheme’s £30bn of support had effectively been wasted because the main effect was to “inflate prices by more than their subsidy value”. The money would have been “better spent on increasing housing supply,” it argued. Meanwhile, housebuilder profits and share prices have gone through the roof.

Builders then got another unnecessary boost during the pandemic from the stamp duty holiday and mortgage guarantee scheme.

The Bank of England insists it hasn’t contributed to the situation, but it failed to act sooner on interest rates while repeating rounds of quantitative easing that have pumped prices up even further.

A repeat of the growth of the last decade is completely unsustainable. Houses that are just about affordable now will become completely unaffordable for pretty much everybody. For any sense of sanity to be restored, prices have to come down. Several years of steady declines would go some way to alleviating the cost of living crunch, while restoring the faith of a generation in the idea of a property-owning democracy.

‘For any sense of sanity to be restored, prices have to come down’