What the you didn't hear in the economy debate(Read article summary)
The housing market is said to be turning around in the UK and the US, but in the economy debate few are looking at the future of higher taxes, higher interest rates, and difficult mortgages.
According to Nationwide, the average cost of a UK home rose by more than 10 percent in the past year – the fastest increase in nearly three years. But as MoneyWeek’s Merryn Somerset Webb put it a couple of weeks ago:
‘The truth being that with house prices still massively overpriced by historical standards; with interest rates only able to rise from here; with unemployment and taxes set to soar; and with mortgages still relatively hard to come by, it is almost impossible to make a case for house prices across the nation to keep on going up.’
Can anyone seriously argue that this isn’t just another bubble? Or are we prepared to accept the obvious: that rising house prices are a sure sign that reflationary monetary and fiscal policies have prevented the economy from rebalancing, and that we’re storing up more trouble for the future?
As far as I can see, house prices simply have to fall again, and while necessary in the long run, that is bound to cause problems for the next government – whether it is a slowdown in consumer spending because people feel less wealthy, households slipping into negative equity, or bank assets declining in value (not least the £282bn of RBS’ toxic assets that the taxpayer is on the hook for).
I hate to say it, but between this and the Greek meltdown, I think boom and bust is going to be with us for a while yet. Until politicians realize that their attempts to control the business cycle just make things worse, history is doomed to repeat itself. Long-term fiscal discipline and sound money offer a way out, but will the next government be brave enough to take it?
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