Even the Financial Times is now worried about house prices

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by Shaun Richards

Sometimes things emerge which make you rub your eyes just to make sure you have read them correctly. An example of this emerged over the weekend as the Financial Times produced this as its lead article to start the week.

Pandemic fuels broadest global house price boom in two decades

The reason for this is that I have spent the last decade making the case for house prices to be in inflation measures and for that reason supporting the UK Retail Prices Index which includes them via the depreciation measure which is around 9% of it. On the other side of the argument has been the economics editor of the Financial Times Chris Giles who has criticised the use of house prices and argued for the use of Imputed Rents. This is also called Rental Equivalence and involves assuming that home owners pay themselves rent which,of course, they do not. So we have house prices soaring whereas the official inflation measures we have do this.

CPI ( the Euro area standard) ignores the issue completely as owner occupied housing is not included but remains the measure used for the Bank of England target. So it is aiming to raise inflation whilst house prices are soaring which is insane. Also the ECB has been found out in the Euro area.

 However, the Governing Council recognises that the inclusion of the costs related to owner-occupied housing in the HICP would better represent the inflation rate that is relevant for households.

CPIH ( the new UK official measure) uses the fantasy Imputed Rents I mentioned earlier to give a completely different answer to using house prices. This is how they come to owner occupiers housing costs rising at 1.6% when there is a house price boom.

Back to the FT

I think most people were aware that we are in a global house price boom rather than this being an example of deep research.

House prices are booming in almost every major economy in the wake of the coronavirus pandemic, forging the broadest rally for more than two decades and reviving economists’ concerns over potential threats to financial stability. Of the 40 countries covered by OECD data, just three experienced real-terms house price falls in the first three months of this year — the smallest proportion since the data series began in 2000, analysis by the Financial Times found.

However the FT then faced a rather obvious problem. Who can they find to support this? I am sure there are amoeba on Mars wondering what the earth will do about the house price spiral. Then it must have occured to someone that using a central banker is too transparent but the central bankers central bank might fool someone.

In the short term, house price growth can be “a good thing for the economy because people who already own homes feel richer and they can spend more due to the valuation of their assets”, said Claudio Borio, head of the monetary and economic department at the Bank for International Settlements, the bank for central banks.

If you introduced him to a group of first-time buyers then we would be set for the equivalent of the “I cannot eat an iPad” moment that stumped William Dudley of the New York Fed in Queens.

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Also Claudio goes on to describe the present situation here as he attempted to cover his back.

However, if it persists it could turn into an unsustainable boom that could eventually push activity “into reverse”, particularly when accompanied by strong credit expansion, he warned.

How Much?

Quite a lot in fact.

Annual house price growth across the OECD group of rich nations hit 9.4 per cent — its fastest pace for 30 years — in the first quarter of 2021, as economies rebounded from last year’s severe coronavirus-triggered recessions……..National data suggest that the broad-based trend continued in the second quarter. In the US, house prices rose at their fastest annual rate in nearly 30 years in April.


The Cause

Things get a bit awkward as these are the things that the FT and BIS have been cheerleaders for.

“Extremely accommodating financial conditions” with record-low interest rates had helped boost house prices at an unusually fast pace during a period of weak economic activity, Borio said.

Also the article ends up unwittingly provides a critique of the campaign of one of the authors in favour of Imputed Rents.

Low borrowing costs make house purchases more affordable relative to rent and to other investments.

Exactly, and this was the central banking plan all along. Also you may note that all the explanations here are coming from central bankers as the next bit comes from the Dallas Fed.

In addition, many households, particularly those that were already better off, have accumulated large savings since the start of the pandemic as lockdowns limited spending while some jobs were protected. “A lot of this additional income has been allocated to the housing market,” said Martínez-García.

So it was official policy to create this and as it happens it got a boost as well from this.

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At the same time, more people decided to move house, often to larger properties in quieter places, following long hours spent at home during lockdown.

A Bubble

It is hard not to laugh at the poor level of analysis here.

Adam Slater, lead economist at Oxford Economics, said properties in advanced economies were about 10 per cent overvalued compared with long-term trends. That makes this boom one of the biggest since 1900, he calculated — although nowhere near as big as the run-up to the financial crisis.

The long-term trend includes a lot of over valuation as we recall a major cause of the credit crunch. Thus long-term trends are a bit of a chocolate teapot.

As to this.

Credit growth is lower than before the global financial crisis, suggesting “a lower risk of a bust compared to, say, 2006-2007”, he said.

Well in the UK we only need to go back to last week.

Net mortgage borrowing hit a record of £17.9 billion in June. The previous record, in March 2021, was £11.5 billion, and borrowing has averaged £5.4 billion in the 12 months to May 2021 ( Bank of England)

So all-time records so far this year….

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I did not know the FT did comedy. At least I think it is humour.

One key factor is different from the situation nearly 15 years ago: central banks scarred by the previous housing bust are now more vigilant.

For new readers it is a bit like including arsonists in your definition of the fire brigade.

Also the bit about the ECB below is Fake News or if you prefer untrue.

The Reserve Bank of New Zealand has added house prices to its mandate and the European Central Bank has asked the EU statistics agency to include house prices in its headline inflation calculation.

Here is Christine Lagarde being interviewed by the FT on July 11th.

The cost of owning a house, not house prices, right? 

We will include the consumption part of owning a house. So we will not include the investment part.


The present situation was the plan all along. What I mean by that is central bankers wanted to keep the option of pumping up house prices for the next economic crisis and that is what they have done. My argument has been that as well as winners there are losers. The article makes the case for wealth effects but underplays the fact that for first-time buyers there has been a lot of inflation. The next swerve is to claim that mortgages are cheap in terms of interest-rates. But this is also misleading because whilst it is true now we find that mortgages are getting ever longer due to the higher prices, we simply do not know what they will be in the future. Some relief is provided by the increasing number of fixed-rate mortgages but the vast majority only last for a few years.

So there is a distributional impact as some get what are windfall gains but others end up paying ever higher prices. Also we should not forget those who are now excluded from the market due to the price level.

This is why the inflation debate has mattered because a proper measure including house prices will limit the freedom of manoeuvre of central banks. The FT arguments for Imputed Rents so forcefully argued by its economics editor Chris Giles have failed utterly. Just as I predicted they would.

Let me provide another warning as this from Gertjan Vlieghe of the Bank of England shows they intend to do it all again next time.

I would be comfortable with cutting Bank Rate to -0.5% or even -0.75% the next
time monetary stimulus is required.

Or if you prefer The Eagles got it right about this policy.

“Relax, ” said the night man,

“We are programmed to receive.

You can check-out any time you like,

But you can never leave! “



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