Assetz® News - Finding the balance

Finding the balance

27th June 2008 |

Those hoping for a recovery in the UK housing market will no doubt be hoping and praying for several things. Firstly, that the credit crunch ends, enabling borrowing to make purchases become more affordable. Secondly, they will hope that the overall UK economy remains in sufficiently strong shape to support both the buyer market and demand for buy-to-let property. Finally, that the Bank of England's monetary policy committee (MPC) makes the right decisions when faced with these challenges.

Few clouds on the horizon could be darker than the looming spectre of stagflation, where the thunder and lightning of rising prices combines with the downpour of economic decline. In addressing the House of Commons Treasury select committee on the issue yesterday, the Bank of England's governor Mervyn King made clear that the tricky "balancing act" that has been the challenge for the MPC over the last few months remains.

Mr King's position, however, may provide come cheer. Having started by predicting further rises in consumer prices index (CPI) inflation, maybe as high as four per cent, he stated: "Although inflation is rising now, we [the MPC] will ensure that it falls back to the two per cent target."

Yet he did not advise that this was necessarily going to be partly the outcome of interest rate rises, something that could further hurt the property market. Instead, Mr King stated that an economic slowdown will be the main factor in lowering inflation. While this meant the MPC should make sure this slowdown was sufficient to take out the inflationary heat that rising oil, food and domestic energy prices have fanned the flames of, he also said the reverse was the case, commenting: " We need to avoid a slowdown that is so pronounced that it would pull inflation down, not just to the target, but below."

Therefore, the "balancing act" remains as before: fears that interest rates may rise and harm the property market further may be tempered by the likelihood that such a move would also cause too deep a slump and with it a situation where eventually Mr King is writing letters to explain why inflation is under one per cent.

In the meantime, for those seeking a shaft of sunlight, one may have been provided today by the Land Registry, which recorded that there has been no change in the seasonally adjusted figure for house prices in England and Wales between April and May, leaving the average price at £183,266.

Coming after a 0.2 per cent drop in prices in April and a 0.4 per cent dip in March, the trend may suggest a slowing down of the decline in house prices, despite the widespread predictions of more property gloom to come. While many are still waiting and hoping for measures such as the Special Liquidity Scheme to bear fruit and help interbank rates fall, the news from the Land Registry, combined with the apparently diminished chances of a rate rise, could mean the picture is brighter than some would suggest.