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Market Update

Since 2008 the Bank of England (along with other central banks) and the Government have been trying to stimulate the economy and fend off deflation. To that end we have seen interest rates cut to 0.5% and numerous forms of quantative easing or asset purchase programs.

Has it worked? Some say yes others say it has merely postponed the inevitable. Only history will show who is right in the absence of facts.

There are two facts released yesterday, the Consumer Price Index (CPI) fell to 0.3% last month, lower than expected and it has now bounced along for over a year at zero or just below or above.

The other fact which some say is a complete contradiction to the CPI is house price inflation. Uk house price inflation was 9% to March, higher than expected and up from 7.6% in February.

Now I wouldn’t get over excited about two pieces of data from two different months, but they do tell a story the Government is clearly missing.

Efforts to kick start inflation and provide some respite for debtors appear to be stalling. Meanwhile house prices charge ahead. Or do they?

The geographical breakdown of house price inflation is interesting.

House prices actually fell in Scotland. Down 6.1%. In Wales they rose 2.1%, N Ireland 6.4% while England as a whole was up 10.1%. Predictably London and its back yards were up 13%.

Money is clearly doing what it always does; it goes where the action is.

So what should the Scottish housing market learn from this. Down 6.1% whilst everywhere else shows growth.

Firstly Land and Buildings Transaction Tax is completely out of kilter with the rest of the UK.

Zero rated up to £145,000 has allowed/encouraged a price hike at the lower end, masked by a dramatic fall in higher end properties.

Scotland’s average home struggles to reach £170,000 whilst in England it is almost £300,000.

So why raise the Zero rated band to £145,000 in Scotland (£125,000) in England? The Scottish Government say it was done to help the FTB, in reality it completely ignored the FTB‘s problem.

So why raise the zero rate band to £145,000. It helps no one; builders have merely pushed up the price of the lower end properties, helped by Government shared equity schemes. Whilst the tax take, shrinks.

At the other end of the market where he has increased the tax to 10 and 12%, the market is dead and the few that do sell, take a massive reduction in price, therefor there too a reduced tax take.

Secondly, developers are being helped with cheap Government land or incentives, planning fast tracked and Help to Buy schemes, all very noble in reasoning, done to help FTB’s.

In truth all it has done is help the developer’s profit margin and prices at the lower end have risen.

Treating the symptoms rather than the cause merely creates new symptoms.

The real problem with the housing market today is that the National Average Wage has shown little increase since 2008, yet house prices for the FTB have soared, thanks to interference in the market.

Low interest rates, forcing banks to increase lending, giving help to developers, and taking an equity share in a FTB property is all fine, but if you can’t afford it, you can’t afford it!

The result is costs have gone up at the lower end, the market is distorted and becoming increasingly unaffordable.

Still I shouldn’t complain, the lower end is selling fast and as the higher end drops, buyers will be found.

Such a shame the Government can’t leave the market alone, and get on with sorting out the economy. When people have jobs and a decent income, they will buy what they want and inflation will return, the housing market will find its own price dictated by affordability rather than incentive schemes, the Government would save a fortune on “schemes” and gain a higher tax take, and developers building genuine FTB properties would earn an honest profit for providing a product at an affordable price that sell well.

At present most people are living on a 2008 income with 2016 costs. Only a politician can’t see that doesn’t work.