House prices have been forecast to rise by 20 per cent between now and 2018. Mortgage lending is forecast to hit its highest level since 2008 this year. Yet lending to business is falling. It may be good for house prices and buy-to-let investors, but for UK plc, and investors in general, I fear we are repeating the errors of the past.
The Centre for Economics and Business Research (CEBR) has form. It has forecast sharp rises in house prices many times over the last couple of years, and now it has done it again. It has forecast that in 2014 the average price of a house in the UK will be £223,000, which is 0.7 per cent up on the 2007 peak. By 2018, it reckons the average prices will have risen to £261,000. Why the rises? It reckons the funding for lending programme is the key, and also predicts another £75 billion worth of QE this year.
The thing is, although some of the CEBR’s previous forecasts for house prices have not been realised, its track record for economic forecasting is actually quite good. And as far as its forecasts for GDP are concerned, it has often been among the most gloomy, and but has often turned out to be the most accurate.
The fact is that house prices, despite being so expensive and despite the worst economic downturn ever recorded, have not crashed like they did in the early 1990s. It is not hard to extrapolate from the track record of the last few years that even a small economic recovery, combined with a big improvement in the availability of funding, may lead to higher house prices.
According to the Bank of England, the interest rates charged on home loans have been falling in recent months, while lending has been up. First time buyers, a species that had appeared to be on the verge of extinction, are among those pushing up demand.
According to the Council of Mortgage Lenders (CML), gross UK mortgage lending hit £143 billion in 2012, £2 billion more than in 2011. The CML forecasts that lending will be around £156 billion this year, which would be the highest level since 2008. Analysts seem pretty unanimous that the funding for lending scheme is having its desired effect.
But Bank of England data also revealed that bank lending to business was £4 billion down in the three months to November, and the bank’s latest report on lending referred to business owners wanting to pay down debt as quickly as possible.
I am getting another painful attack of déjà vu.
So, despite the fact that each year the average household has had less disposable income than the year before, we are told that house prices are going to go up. Presumably, if they do indeed rise, households may be encouraged to borrow more, and fund their spending via credit cards. Maybe, just maybe, if this happens, businesses will find they can sell more of their products and thus may start to invest more and be less enthusiastic about paying down debt.
But to me, it seems as if everything is back to front. Here we are, four and a bit years on from the crisis of 2008 and nothing seems to have changed. GDP is not trickling down into wages and promoting spending, it is trickling down into higher house prices encouraging spending, instead.
The conditions we seem to be trying to recreate may have led to an economic boom, and indeed stock market boom, but they also led to a very nasty crash.
What the UK needs is for growth to be led by innovating business. Lending is not the answer, because who wants to run up debts in times like these? No, what business needs is investors who share in their good and bad fortunes; who share their pain and success. That is why QE used to fund investment into entrepreneurs is, in my view, the only way the UK can create a sustainable recovery.
These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees