House Price Inflation

The Chartered Surveyors were right to call on the Bank of England to keep house inflation at moderate levels, but their suggested rate of 5% per year is too high. House prices are already far too high and must actually fall in real terms over the next decade, if the economy is to enjoy any kind of sustained recovery based on the creation of new wealth as opposed to the failed model of continuous asset inflation. To compete in world markets labour costs must not be too high, but if housing costs are above average either workers have to be paid more or the government has to subsidise them with housing benefit.

I have argued since 2009 that house prices must not be allowed to rise more than inflation and must be reduced in the long term by a huge programme of house building. It is good to see the surveyors are now adding their influential voice to this self evident economic truth, but the figure they have chosen is wrong. You can only store up problems leading to another bust if house prices rise faster than inflation. The two must be linked (or house prices held lower) and the market must be brought under the official inflation remit to the Bank issued by the Chancellor.

In the near term a preferential mortgage rate can be available for new homes, to encourage building, but the government mortgage guarantee is a serious miscalculation, widely criticised by economists and commentators, which will eventually lead to an unwelcome house price surge and the unravelling of the credibility of the Chancellor.

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