For about three months, I have had this stomach churning sense that house prices might be turning. The crash could be over, and we might be on the verge of a renewed housing bubble. Today's house price data confirmed my worst fears. In May, prices increased by 2.6 percent.
We are about to learn the full meaning of moral hazard. If the current financial crisis has taught us anything, it is that the UK government will do anything to prevent house prices from falling. If prices begin to wobble, it will cut interest rates to zero; it will prevent insolvent banks from going bankrupt, and it will provide limitless guarantees for mortgage lending.
Brown, with the connivance of the Bank of England, created the basis for a pernicious but credible belief, that house prices are a one way bet. If they go up, homeowners get rich; if they fall, the government will sort the problem out. In short, the state is prepared to guarantee house prices.
So what happens next? Unless there is a sudden reversal of monetary policy, we are on the verge of the mother of all housing bubbles. Policy interest rates are negative; banks are being pressurized to lend by the government, and house prices have turned. In addition, there is that now well estabilished belief that the government will do anything to stop prices from falling.
The dangers of a renewed housing bubble are obvious. The Bank of England should begin to raise rates right now. It should anticipate the forthcoming surge in housing related lending. But somehow, I think the MPC will delay, and try to ride short run political benefits of the uptick in house prices.
Thus, it would appear that we never learn. We keep making the same tedious mistake, allowing the housing market to sit at the centre of economic policy making.