Up, up and away! The rest of the economy is rapidly heading south, yet the property market keeps on rising. House prices hit a record high last month, according to Nationwide building society, and are increasing at the fastest rate since 2004. The news is striking, but it fits with reports of a “frenzy” in the market, where homes are selling at their asking price or more, and inner-city households are moving out to the suburbs and the countryside in search of gardens and home-office space. Back in July, the Bank of England’s chief economist, Andy Haldane, promised a V-shaped recovery. Two months later, that forecast has failed to apply to almost every sector – apart from asset markets.
Some of this is a rebound in activity after lockdown, when property viewings and transactions came to a halt. But estate agents and chartered surveyors can also thank Rishi Sunak for his suspension of stamp duty on properties worth less than £500,000. Most of all, they owe the Bank a debt of gratitude for flooding markets with ultra-cheap money in response to the pandemic. Indeed, the state’s response to Covid-19 resembles, in some key aspects, its reaction to the banking crash of 2008. Ministers explicitly try to prop up the property market, while central bankers pump markets with money, much of which goes not into productive investment that might create jobs, but into speculative purchases of houses, artworks and shares.
Perhaps Boris Johnson, who declares himself a believer in “boosterism”, will welcome all this as glad tidings. Except it’s not, really. It’s dangerous for society, risky for the economy and a huge gamble for politicians. The economy is sinking into a depression, with the official forecast for unemployment to hit 3.5 million by Christmas. One outcome of the worst jobs crisis in decades will be that some households will struggle to keep up their mortgage payments while landlords may not receive the rent they require to make their investments worthwhile – and so will sell their properties. The Office for Budget Responsibility forecasts a 12% cumulative fall in house prices by the end of next year. If it is anywhere close to accurate, that makes this summer the boom before a big bust. Buyers could be stretching themselves to get on or up the housing ladder just before sliding off into negative equity. Some of the blame for that will end up at the door of No 11, for Mr Sunak’s £4bn stamp duty cut.
In the financial markets that gave Mr Sunak his first jobs, an old proverb warns: don’t catch a falling knife. Yet, that appears to be what the chancellor is doing, by pumping up property prices just before a big drop. Instead, he should extend the ban on tenant evictions, and negotiate with mortgage lenders to forestall mass repossessions. He should instruct financial regulators to keep a closer eye on the size of mortgages on offer. Most of all, he should take advantage of low interest rates to fund a big new public-housing programme. Such policies would be both prudent and progressive.