Letter from a worried London

Many analysts fear London’s charge towards economic health – in services, automotives and importantly, housing – is leading the city straight into potential bubbles.


The good news is that all the indicators say the British economy is bursting out of recession. The bad news is that most people simply don’t believe it.

After five years of the deepest gloom, the statistics tell us that services industries – by far the largest sector of the British economy – are growing at their fastest pace since 1997. There is also growth in manufacturing and new car sales are the best they’ve been in five years. Indicators suggest that GDP is growing at a rate of 3 per cent and this has been achieved without stirring up inflation. Read this and you might reasonably think that the people of Britain must be dancing in the streets and singing in the saloons.

Far from it. One consequence of five years of economic heartache is that the focus is not on the possibility that the country might be emerging into the light, but on falling living standards and government debt. This is still huge by any standards (the budget deficit this year is just under £120 billion, or $203.46), and is falling more slowly than Treasury hoped. David Cameron, the nation’s chief publicist, told the Tory Party conference last week that this means we should grit our teeth and prepare for seven more years of austerity. That takes us to 2020.

For these reasons, the feel-good factor has been mislaid among the debris of a very bad slump. There always seems to be a reason to dilute the good news. Take car sales, for example. Now that it is owned by foreigners, the British car industry is the most successful in Europe, easily outselling all its competitors in the European Union. But hold on. Because interest rates are so low, 75 per cent of new cars are bought on credit, compared to only 50 per cent before the fall in 2008.

Consumer credit is now growing at rates last seen in 2008, and pessimistic commentators recall the theory that states the only thing men learn from history is that men learn nothing from history. The Financial Times quotes two unnamed spokespersons from the Finance and Lending Association as saying that if car sales rise to 2.4 million, against expectations of 2.2 million in 2013, “lenders would be spooked by a potential bubble”.

God save us. It was a bubble in the housing market that shivered and shook before bursting in 2008. Those were the bad old days when banks were so anxious to increase their share of the mortgage market that they did not check the incomes declared by customers, and they imprudently offered mortgages of 120 per cent. So deep was the belief then that house prices could only rise that many buyers took out interest-only mortgages, confident that their house would rise in value fast enough to cover the principal when the loan became due.

Now house prices are finally rising again. The Bank of England’s Financial Policy Committee reports a 30 per cent year-on-year increase in mortgage approvals in July, and an increase of 5 per cent in house prices in August. A think-tank report speculates that prices in London will rise by no less than 43.5 per cent by 2018 to make an average house cost £566,000. But the London market is massively distorted by foreign buyers from nations in crisis such as Greece and Spain, and from south-east Asia, where discretionary incomes have exploded. They are persuaded that London property is a safe bet, and since they pay in cash, the volume of bank credit does not rise with the prices.

Londoners are being priced out of their own market. Prices in Islington, the north London borough where I live, are rising so fast that gentrification, which enabled people like me in the 1960s and 1970s to buy houses in run-down Georgian terraces at affordable prices, is being replaced by 'super-gentrification'. Rich folk from the city and foreign investors now bid up prices beyond the reach of 'ordinary middle-class residents'.

To help young people get a foot on the ladder in the housing market, George Osborne, the Chancellor of the Exchequer, has introduced a scheme called “Help to Buy”. This gives a government guarantee to commercial banks, to cover up to three quarters of the 20 per cent deposit required for a mortgage on a house or flat valued at up to £600,000. The scheme has learned lessons from experience: incomes will now be scrutinised, interest-only mortgages banned, and a loan can cover no more than 90 per cent of the purchase price. But this optimistic piece of social engineering has given Osborne’s critics a stick with which to beat him:

The volume of chatter about “Help to Buy” contributing a new housing bubble has made the Chancellor twitchy. Initially, he proposed that the Bank of England should assess the scheme every three years. Last week he changed his mind and asked the bank to look at the impact every 12 months. Because of the current low interest rates, mortgages are cheaper than they have ever been. Mark Carney, the Canadian governor of the bank, fears that some house buyers will not be able to afford their repayments when interest rates rise again, as they surely will. Using Bank of England-speak, he promises to be “vigilant to potential emerging vulnerabilities”.

Meanwhile, the central bank says there is no housing bubble. Yes, prices are recovering but there are no signs of overheating. Activity in the housing market is still below historical averages, especially outside London, and household debt-servicing levels are low.

That good news is accepted by roughly half of the economic pundits. The other half doesn’t believe it. I prefer the good news. But whether you do or don’t has little to do with economic indicators and statistics. It is depends mostly on whether you are, by nature, an optimist or a pessimist.

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