George Osborne said yesterday that house prices could go on rising for ten years. If the rise is greater than inflation, the economic outcome will be no better than a series of booms and busts, with such side-effects as to cripple the global competiveness of the economy.
For example, if average house prices rose at the current rate for ten years, the average for the country as a whole would be nearly £350,000. This is utterly incompatible with an inflation target of 2% and will make the economy so out of balance that it will become chronically unstable. The Bank of England would have to act long before to rein in house price rises, or abdicate from any semblance of prudent economic management. The Governor knows this and has already indicated the Bank’s willingness to act.
It therefore appears that the Chancellor showed an alarming lack of grasp of the reality of his economic policy. This is that we have a recovery fuelled by house price inflation and borrowing secured against inflating assets which will lead to a boom, which will then become a bust. In fact the Chancellor understands perfectly well. He designed it that way because it is the only kind of recovery the Tories have ever been able to engineer. Things will be booming in the spring of 2015, boosting the Tory electoral chances, and will be busting within a year after that.
The glimmer of hope is that Mark Carney will throw a spanner into these cynical works. He says he will. We say he must.