Monday, November 13, 2006

1989 all over again

The Bank of England’s decision to raise the rate of interest to 5% came as no surprise to the City after the well trailed itchiness of the monetary-policy committee last October.

Inflation, at 2.4% is still running a little too hot for the Bank’s taste and in a bid to bring it below the magic 2% mark, raising the price of money was probably a well calculated risk. After all, consumers show little sign of curbing their enthusiasm after the recent wobble in consumer spending gave way to a resurgence which will be good news to retailers ahead of the Christmas rush.

Underpinning this confidence to flash the cash is the extraordinary rise and rise of the property market. The capital especially is seeing the worst excesses as record city bonuses set well-funded buyers against one another in a bid to secure the house of their dreams.

Well-to-do areas are especially valued as bankers square off against wealthy foreigners (exempted from paying tax on income earned outside the UK). Kensington and Chelsea, for example, proves that its effect over inflation extends beyond the A-list, averaging out at a hefty 11% a year and the ‘extraordinary’ market (properties over £8.5m) reaching highs unseen in over two decades. (These same buyers are increasingly purchasing buy-to-let properties as an investment, paradoxically flattening the rental market and making life easier for those too poor to buy in the first place.)

The trend is accelerating with the capital’s overall rate now standing at 9%. A potential boon for the Tory prospects of holding key marginals, as even a modest pad in Hammersmith and Fulham, or Battersea, regularly tops £650,000 attracting aspirational young professionals, a group beginning to rail against Labour’s high-taxing/free-spending tendencies.

However, the sting is in the tail. The house price pornography that delights the property owning middle-classes and feeds their economy-supporting spending habits, has made the UK dangerously reliant on consumers continuing to feel sufficiently flush to keep on spending. (The ‘wobble’ mentioned at the start of this piece halved consumer spending to 1.4% from 3.5% two years ago and that in a property market that was flattening gradually.)

As government spending slows and the US economy begins to weaken, the reliance on a continued property boom may become intolerable. Already the property market is seeing the excesses that made it notorious in the late-eighties (gazumping and other dirty tricks are showing a remarkably strong resurgence). If house price inflation continues to rocket an incoming Conservative government may be just in time to feel the full effects of a house price crash and economy in recession, with little room to manoeuvre thanks to a current account deficit courtesy of Mr Brown.

1989 saw a house price crash that flattened the market for a decade, will 2009 be 1989 for the Conservatives all over again?

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