MPs fear house prices are unsustainable
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Treasury select committee MPs have warned that current house price levels could be under threat if interest rates increase.
In the committee’s feedback on the pre-Budget report, the MPs warn that while house prices now appear to have steadied themselves, they have done so at a level which is still relatively high compared with earnings, leaving them vulnerable to further potential shocks.
In its report on the PBR, the TSC says: “House prices appear to have stabilised, but at an historically high price to earnings ratio.
“We are concerned that such a position is potentially unsustainable, given that monetary policy will eventually tighten.”
The MPs call on the Government to undertake further work into the sensitivity of the housing market to future employment and interest rate movements in time to produce feedback for the next Budget.
The TSC also criticises the Government for not providing enough detail on how it intends to reduce the structural defecit and for failing to provide more detailed figures on future expenditure.
The MPs point out that there is uncertainty over when is the best time to withdraw the fiscal stimulus.
TSC chairman and Labour MP John McFall (pictured) says: “The governor of the Bank of England encapsulated the problem of when to withdraw fiscal stimulus, when he told us ‘we should do it at the right time.’
“Unfortunately, there is no common definition of the ‘right time’ for fiscal consolidation.”
He adds: “We consider clarity, even if it is clarity about the degree of uncertainty surrounding the forecasts, as essential to strengthening this crucial credibility. That is what our report calls for today.”
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Readers' comments (21)
MP Wooden Spoon Award Team | 6 Jan 2010 2:37 pm
What does McFall know? Nothing as he was a schoolteacher by profession before heading up the TSC. What a waste of time he and the other members of the TSC are.
He's wrong. Supply and demand will also control house prices as well as anything else. Too little supply with more buyers keeps the prices a bit spicey. So his gvt's failure having re-financed the banks whilst they are not lending it out at a fair price. PRICES WILL STAY RELATIVELY HIGH UNTIL THE MARKET IS ALLOWED TO COMPETE.
Any more lessons for Labour DUMBOS?
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John Whipple | 6 Jan 2010 2:46 pm
Drug of Choice for the Political Elite
A £500 million a day habit and as with all drug takers nothing to show for it. Never the right time to give up as the receptors cry out for more.
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Anonymous | 6 Jan 2010 3:09 pm
Unless someody takes their finger out the whole financial system appears to be unsustainable.
As far as house prices are concerned these MPs have VERY short memories, or is it that old selective memory syndrome again?
Untless they build more houses or allow us to build on our own land there will always be artificially high prices, if the banks start throwing money at their buddies in the construction again then perhaps supply will exceed demand.
Other methods of reducing house prices to a reasonable level include, enforced birth control, euthansia for the elderly and of course a ban on immigration.
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Julian Stevens | 6 Jan 2010 3:18 pm
House prices have been unsustainable from about 2000 onwards. Labour just sat back and allowed the situation to get ever worse, whilst the FSA failed totally to regulate mortgage lending and broking practices until about 2008. What was the FSA doing for the first four years from when it assumed responsibility for mortgage regulation in November 2004? Bugger all by the looks of it.
Any substantial increase in interest rates is going to send major shockwaves through a still hugely over-mortgaged homebuyer market. Everyone coming off low fixed rate mortgages is already finding themselves shoehorned into deals that they wouldn't opt for but simply have no choice but to accept.
My prediction is that it'll take best part of a decade for the present situation to resolve itself.
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Steve Laird | 6 Jan 2010 3:20 pm
He adds: “We consider clarity, even if it is clarity about the degree of uncertainty surrounding the forecasts, as essential to strengthening this crucial credibility. That is what our report calls for today.”
Is he having a laugh? Must be a cue for an honourary MA in English Literature!
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Anonymous | 6 Jan 2010 3:22 pm
This says it all. I have worked as a valuer for over 30 years, mostly in the housing market for financial institutions, and with the exceptions of properties which appeal in the International Markets or are in areas where large City bonuses come into play, where there are shortages of prime family properties in inner London areas, it has been clear to me that House Prices have only risen as far as they have in this country for 2 main reasons, inherited property from the 1st / 2nd generation of home owners and lenders willingness to lend ever higher income mulitples. Banks/Building Societies only used to lend 2.5x or 3x the main income and possibly 1x a second income; now they have been lending up to 5x both incomes. Hence I would completely agree current price levels are likely to be unstainable once this fiscal easing is withdrawn.
Call me cynical but all we seem to be doing is artificially putting off the fundamental problem until after a general election, by which time much of the redundancy money, and the savings from very low interest rates for those on large tracker mortgages, which must be helping fuel current consmer spending, will also have dried up and will accentuate the problem.
Ignoring these current, short term, market stimuli I would suggest that over the years much consumer spending has been related to house price inflation as homeowners borrow long; for short term expenditure; to refinance credit cards or produce the deposit for a Buy-to-let mortgage etc. Home mortgages have also been used as a cheap way to raise business capital at a rate not reflecting the riskines of the venture, but more related to the lenders ability to recoup the money from ever rising house prices. No wonder we have a worse personal debt problem than other countries and now a worse National Debt problem.
Financing consumer booms from the housing market has to be unsustainable long term. Rather like the dot.com bubble where many forgot the fundamental "you have to make a profit to sustain any business" we seem to have forgotten the basis of economic activity that you have to PRODUCE something that other people want.
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michael brayne | 6 Jan 2010 3:25 pm
If the price of property is too high now, it must have been too high three years ago, but this government nor the FSA did anything about it then. All they had to do was tell lenders the maximum you can lend is say 4 x times income and you must see concrete proof of income and all this suffering good have been avoided.
We all know the most risky investment are geared investment and that is precisely what the property market is.
RIP the Brown bubble.
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Andy | 6 Jan 2010 3:45 pm
MPs might "fear" a fall in house prices, so what ?
Ask any potential first time buyer, or someone wanting to move to a bigger/better home is they feel the same "fear".
It`s about time the "House Price Inflation" junkies tried to kick their habit, and realise that most of us would actually be better off if the UK had an economy reliant on industry/manufacturing and inovation, rather than selling each other ever more expensive piles of bricks, with ever higher levels of debt.
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Anonymous | 6 Jan 2010 4:16 pm
It's nice to see an unbiased and truthful opinion for once instead of reading the opinions of stakeholders in the property market, all of whom want to read the words "house prices are rising". Current levels are still unsustainable, there is too much supply and not enough demand - you only have to see the number of houses not selling on Rightmove.com to see that! There is still plenty of room for further falls before we get to a sensible level.
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Alan | 6 Jan 2010 4:45 pm
I agree with Julian Stevens in that the housing market will take 10 years or thereabouts to unwind. It took 12 years to peak and we are only 2 years into the correction so 10 years or so seems very reasonable and will mirror previous housing corrections.
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