According to Nationwide, the average cost of a UK home rose by more than 10 percent in the past year – the fastest increase in nearly three years. But as MoneyWeek’s Merryn Somerset Webb put it a couple of weeks ago:
‘The truth being that with house prices still massively overpriced by historical standards; with interest rates only able to rise from here; with unemployment and taxes set to soar; and with mortgages still relatively hard to come by, it is almost impossible to make a case for house prices across the nation to keep on going up.’
Can anyone seriously argue that this isn’t just another bubble? Or are we prepared to accept the obvious: that rising house prices are a sure sign that reflationary monetary and fiscal policies have prevented the economy from rebalancing, and that we’re storing up more trouble for the future?
As far as I can see, house prices simply have to fall again, and while necessary in the long run, that is bound to cause problems for the next government – whether it is a slowdown in consumer spending because people feel less wealthy, households slipping into negative equity, or bank assets declining in value (not least the £282bn of RBS’ toxic assets that the taxpayer is on the hook for).
I hate to say it, but between this and the Greek meltdown, I think boom and bust is going to be with us for a while yet. Until politicians realize that their attempts to control the business cycle just make things worse, history is doomed to repeat itself. Long-term fiscal discipline and sound money offer a way out, but will the next government be brave enough to take it?