Soaring house prices and cheap credit are creating the wrong sort of growth
A familiar UK recovery led by a property boom and debt-fuelled consumption does not qualify as ‘building back better’
The average house price, according to the Nationwide building society, rose by £6,000 in April, or £200 a day. In the course of the month, the cost of property increased by 2.1% – the highest one-month jump since 2004.
Everywhere there are signs of boom conditions: buyers putting in offers without even seeing the property they are after; agents asking for best and final offers well in excess of the asking price; lenders trying to compensate for spiralling prices by offering cheaper home-loan rates and easier terms.
There is more to come. The Bank of England – despite evidence that the economy is emerging more rapidly from its deep winter freeze than expected – will keep official interest rates at 0.1% when it meets this week. Threadneedle Street’s quantitative easing programme is creating the cash that is lubricating the property market.
At the Treasury, Rishi Sunak has extended the stamp duty holiday, which now comes to a final end in September, and with prices rising, buyers have an added incentive to get their deals done quickly. The fact that the housing market was in the doldrums last spring because of the first lockdown will mean double-digit house price inflation within the next few months.
In one sense, this is good news. The UK is so dependent on the state of the residential property market that the current burst of activity increases the chances of a rapid bounce-back from Covid-19. Homebuyers employ solicitors to do their conveyancing. They spend money on furnishings and white goods, ensuring shops and distribution centres stay busy. Even without the feelgood factor engendered by rising prices, there are considerable spill-over effects when the market is hot.
All that said, however, an incipient property bubble is unwelcome for a number of reasons. First, it entrenches already serious inequalities between young and old, between rich and poor, and between owner-occupiers and renters. It is not immediately obvious why a young couple desperately saving up to buy their first home but needing to find an ever-higher deposit would consider rising prices to be a good thing.
The second issue is that this is the wrong sort of growth. There is an awful lot of talk about the need to “build back better” from the pandemic, but that rhetoric sits oddly with a bog-standard recovery built on cheap money, property speculation and debt-driven consumption. Britain has been here many times before and it has never ended well.
The third issue is that the boom is bound to end at some point, either because policy is tightened, because prices become so inflated that first-time buyers are squeezed out and the market gums up, or because there is some other negative shock.
As things stand, there is only a limited chance of the sort of severe policy tightening that would lead to a crash. True, the end of the stamp duty holiday will act as a cliff-edge in the autumn, and so will put the brakes on activity over the winter. But it would require the Bank of England to push interest rates up markedly – to between 2% and 3% – later this year in order for buyers to face serious financial problems. That’s possible, but not probable.
The market losing momentum due to prices becoming too hot for first-time buyers looks a much more likely scenario, and is indeed what happened to check the boom in the mid-2000s. But an unexpected shock – a fresh wave of the pandemic, a sharp rise in unemployment caused by businesses being unable to cope when government support is withdrawn – would certainly weigh heavily on the market. Both are possible.
Banks not as bullish as they seem about recovery
UK bank results week ended with a bang. After more than a year of lockdowns, Barclays gave Britons a shred of hope by declaring that the UK was on track for its biggest boom since 1948.
Chief executive Jes Staley hailed the UK’s vaccine rollout, and predicted that “tremendous pent-up demand” was about to be unleashed by cash-rich consumers lucky enough to have kept their jobs during the pandemic.
But while headline-grabbing, his prediction masked the fact that some British banks are holding back until the boom actually appears.
“While evidence of recovery is encouraging, we have continued to take a cautious view of the impact of the pandemic on the business,” Staley said, to much less fanfare.
So rather than following HSBC, Lloyds and NatWest in releasing hundreds of millions of pounds originally meant to cushion the blow of potential defaults, Barclays took a further £55m charge, saying it would keep a close eye on the effect of unwinding government support. So much for charging full-throttle into the “Roaring 20s”.
Meanwhile, NatWest’s own cautious message was buried by renewed interest in plans to shift its headquarters from Edinburgh to London in the event of Scottish independence.
Although it reported forecast-beating profits and released about £102m in bad-debt reserves, chief executive Alison Rose warned it was too early to comment on the impact of the looser lockdown restrictions until later this year.
Barclays also reminded investors that the UK’s economic allies continue to struggle. The bank said it was trying to support its 20,000 Indian staff as they dealt with a devastating surge in Covid cases – a reminder that the uneven global recovery could threaten even the most upbeat of forecasts.
BT’s early bath leaves Premier League short of a big-time player
BT’s decade-long, multibillion-pound mission to become a sports broadcaster to rival Sky is over. The telecoms giant is seeking a strategic partner to inject cash into BT Sport, its pay-TV service broadcasting Premier League and Champions League football, so it can focus on upgrading the nation’s internet and mobile networks and reignite a lacklustre share price.
BT is hoping to find a player – be it Amazon, Disney, sports streamer Dazn, ITV or private equity – willing to help defray the huge cost of sports rights. In reality, it effectively called full time on expanding the service – which has lost it £2bn and is barely profitable, with just a few million customers – some years ago.
A decade ago, BT Sport successfully halted the loss of millions of broadband customers a year to Sky, but now it casts an increasingly awkward and unjustifiable shadow on the balance sheet. Shareholders are focused on BT’s £12bn investment in broadband, billions more for 5G rollout, the £9.5bn pension deficit, and the return of dividends. Spending another £2bn on top-flight football deals doesn’t look good.
Three years ago, BT and Sky brokered a peace deal: a channel-sharing agreement that meant fans no longer needed separate pay-TV subscriptions to watch all matches. It led to a £600m drop in the value of Premier League TV rights. Since then, BT has been happy as a “viable second” competitor and Sky, already disciplined on sports rights bids, has become even more so since its takeover by US giant Comcast.
The Premier League is facing another drop in income when the rights for the three seasons to 2025 are sold later this year, and is looking to roll over existing deals with Sky, BT and Amazon. Following the disastrous reputational damage the European Super League did to the beautiful game, sports rights holders will be hoping that, with BT coming off the field, a new player will step up to ensure big-money TV deals remain part of the game.
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