UK housing market boom on Bank of England’s radar

• Is the UK housing boom a cause for concern?
• Bank of England carefully monitoring rising housing prices in Britain
• UK housing market boom runs inflation risk
• Other economies, including the Eurozone, also experiencing inflationary pressures

The UK’s housing market collapsed twelve months ago following the imposition of the first national coronavirus lockdown, with transactions tumbling to a record low of 42K in April 2020.

However, the UK’s housing market came roaring back to life last summer after the British Chancellor of Exchequer Rishi Sunak introduced the stamp duty holiday.

In the year to March 2021, UK property prices surged by 10.2% – the fastest rate of growth in nearly 15 years, with real estate agents citing the stamp duty holiday extension as the reason for increased demand.

Initially, the tax break was supposed to conclude on March 31st 2021, but Mr Sunak announced an extension to the scheme during his annual budget speech.

The stamp duty holiday has been extended in full to June-end, after which it will be tapered to a close on September 30th.

As first-time buyers and existing homeowners are aware of the timeline for the tax holiday, many are rushing to get transactions over the line to take advantage of the savings, hence the buoyant activity in the housing market.

According to Bank of England (BoE) figures, mortgage borrowing rose by a net GBP 11.8BN in the last month of the first quarter – the strongest rise since the series began in 1993.

Separate data from Nationwide also revealed that average housing prices soared by 1.8% to 10.9% in May following April’s 2.3% rise – the highest level in six years.

The average house price in the UK has now hit an all-time high of GBP 242,832, a GBP 25K increase over the past year.

Nationwide said house price growth was driven by changing priorities, as buyers are now searching for larger homes with abundant outdoor space away from metropolitan cities.

According to their research, younger buyers are also keen to move to more rural locations across the country. As the coronavirus pandemic has led to an increase in remote working, living near offices is no longer an essential requirement.

During an interview with the BBC, the Bank of England’s Deputy Governor for Financial Stability Jon Cunliffe said that “changing priorities may affect the future of the housing market.”

Mr Cunliffe’s comments follow BoE Deputy Governor for Markets and Banking, Sir Dave Ramsden statement. Deputy Governor Ramsden said most central bank policymakers expect price pressures to be temporary.

BoE believes house price pressure is temporary

In an interview with the Guardian, Sir Dave Ramsden said the BoE were aware of the risks of rising housing prices and are monitoring the situation carefully to ensure a lack of supply does not amplify inflationary pressures.

Deputy Governor Ramsden stated that policymakers would guard against price pressures and are already “looking at the UK property market and a raft of real-term indicators.”

Currently, UK inflation is at 1.5%; however, many anticipate that it will rise above the BoE’s 2% target as Britain’s economy reopens and a wave of pent-up consumer demand is unleashed.

Although the BoE is monitoring UK housing market growth, they believe that the predicted consumer spending boom, driven by recovery from COVID-19, will generate a sustained period of inflation.

Sir Dave Ramsden also said inflation might run lower than expected if economic activity slows following the forecasted consumer spending boom in Q2 2021.

However, outgoing Chief Economist, Andy Haldane, has made a case for tapering the Bank of England’s massive quantitative easing (QE) programme by GBP 50BN.

Mr Haldane believes the UK will undergo a robust economic recovery in 2021, arguing that increased spending will lead to higher prices for manufacturers, who will pass costs onto consumers.

He added that if recovery gets underhand and inflation spikes, the implications will spill over to “wages that workers demand” and reduce spending as lower-income households cannot afford new prices.

Andy Haldane said he is not stating that the central bank should slam on the brakes but gently take the foot off the accelerator to prevent derailing broader economic recovery.

However, his fellow BoE colleagues appear to disagree, warning that prematurely tightening stimulus measures could cause long-lasting damage to the UK economy.

BoE policymakers divided over signs of rising inflation

BoE Monetary Policy Committee (MPC) member Gertjan Vlieghe insists that tightening policy too soon would negatively affect the UK economy and believes that a rate hike in 2022 is a more reasonable action to take.

The British-Belgian economist acknowledged that economic recovery has been impressive thus far but warned that it remains far from absolute.

During an online lecture, Mr Vlieghe said: “While Britain’s economic prospects are far greater than they were at any time during the last 12 months, the country is not out of danger yet.”

Gertjan Vlieghe said it was best to wait and see where the economy is post-furlough before tightening policy.

He added that if most furloughed workers return to firms this autumn, spare capacity is used up, and inflation is at sustainable levels, only then would it be the time to taper.

The MPC member also highlighted the risk of further economic deterioration – amid the threat of emerging COVID strains – forcing the central bank to slash rates into negative territory to rescue the economy.

In that view, “tapering policy now would be a more costly mistake than tightening too late,” says Mr Vlieghe.

Deputy Governor Sir Dave Ramsden insists that the BoE keeps a close eye on inflation and has the necessary tools to act if inflationary pressures prove more enduring.

During an interview, Sir Ramsden stressed that he is confident that the BoE “could drive the base rate up from the historically low 0.1% and that policymakers are aware of what that would do to demand, primarily if new coronavirus mutations emerge.”

He added: “Although Britain’s progressive vaccination campaign has provided greater certainty over the UK’s economic prospects, COVID-19 has not gone away, and new variants are still emerging.

“While the total number of cases, hospitalisations and deaths are lower, the UK government could reintroduce more stringent restrictions if there is an exponential surge in caseloads, and we have to be prepared for that possibility.”

Despite reports of inflationary pressures in the technology and manufacturing sectors, Dave Ramsden said there is currently no evidence of persisting cost-push tensions.

Still, while the central bank is reluctant to tighten policy, any further easing is unlikely as Sir Ramsden hinted that a negative rate cut was not in the BoE’s plan.

He noted that a negative interest rate cut would be an unwelcome surprise for financial markets but that the central bank would be prepared to make such a move if it would support the economy.

The Deputy Governor also told the Guardian about how the Bank of England plans to help the UK government transition to a net-zero economy by 2050.

According to Mr Ramsden, the BoE will encourage companies to reduce their carbon emissions by switching to cleaner fuels to lower greenhouse gas emissions.

The central bank will also use its GBP 20BN corporate bond holdings to reinforce incentives and long-term changes, rather than quick fixes in the move to net zero.

Eurozone inflation exceeds ECB’s target

The UK isn’t the only country experiencing inflationary pressures as inflation levels in the Eurozone have also risen sharply over the last month.

According to the latest data, Eurozone inflation exceeded the European Central Bank’s (ECB) 1.6% – 1.8% target in May and posted just under 2% – the first time the rate has surpassed the ECB’s target since 2018.

The pickup in prices comes ahead of the ECB meeting of policymakers on June 10th, where new economic projections and stimulus measures are expected to be discussed.

However, given that inflation surpassed the central bank’s target, policymakers will likely spend a lot of time debating whether rising prices are temporary or more durable.

Eurozone’s figure also plays into a debate about whether rapid recovery from the coronavirus-induced slump could become a significant issue for economies across the world.

For the greater part of the last decade, central banks were worried that inflation was too low. Low prices tend to signal slow economic growth and associated weakness within an economy.

But now that coronavirus restrictions are being eased and consumers return to normality, increased economic activity runs the risk of higher interest rates, higher prices, and lack of supply.