I am becoming increasingly concerned over what may happen to the property market – and not just in this country. Real estate values are rising in many areas.
Wealth is being created for those already on the property ladder. For those not so fortunate, access is becoming more difficult. Perhaps of even greater importance, the inexorable march of property values in this country is fuelling a debt explosion that may have dire economic consequences.
Abroad, the fashion to own a second home is creating distortions in property values that could encourage intervention by governments. It is estimated that more than 500,000 Britons possess a property in France, with a similar number owning homes in Spain. Many of these have chosen to live in their adopted country but the weight of numbers is allowing people to live abroad without integrating. This creates a climate where the introduction of selective measures to differentiate between classes of owner becomes possible.
This is already happening in some measure in this country. Local councils have the right to exact a full tax charge from a second home. Barely a week goes by without some area of the country complaining that incomers are driving up the price of property to levels that are unaffordable to local residents. A good old-fashioned property crash might sort out some of these problems but what would be the cost?
Behind the rise in property values here and in other countries lies the ready availability of finance from the banking system. In this year's equity gilt study from Barclays Capital, the point is made that monetary policy from central banks has been geared towards fending off deflation. The resultant cheap money policy has driven down the cost of borrowing and made maintaining big levels of debt that much more affordable. It has also created a situation fraught with risk for those with high debt-to-equity ratios.
Perhaps one of the more telling statistics that was published recently has been the level of remortgaging. It would be wrong to assume that all this extra money is finding its way on to the high street but the apparent unstoppable rise in the value of people's homes is encouraging spending. Some of this undoubtedly is being spent on home improvements but enough will be discretionary expenditure outside the home to make our current economic growth vulnerable to any downturn in the property market.
Quite what governments will do about this is far from clear. For a start, monetary policy is in the hands of an independent central bank – and that applies overseas as well as here. British industry is lobbying the Bank of England to fend off further interest rate rises. Strong sterling and dearer money is cutting into the competitiveness of British firms, but with debt rising and property prices still on the up, it is hard to see the monetary policy committee taking much notice.
Not so very long ago, the Government could have ordered banks to restrict their lending. It is difficult to pursue such a policy today, with many of our banks part of global financial concerns and the ethos of the free market firmly embedded in Downing Street. However, other policies could be introduced. Only time will tell whether they will have the desired effect.