With house prices leaping by 25% in the past year, economists are split on what this means for the future of the wider economy – will it be as damaging as we are told it will be?
The increase in housing prices started from an already high point, which relative to incomes stood at 40% above the historical average. According to some economists, it is not the house prices that pose a direct threat to the economy, rather the household debt (which stands at 30 percentage points above late-1980s levels) – both of which are inevitably linked. This means that as prices rise, the amount of accumulated debt will increase and will pose a threat to banks and the overall economy.
On the other hand, some economists argue that the reason for the increase in prices is due to low interest rates and a surge in confidence. Therefore the emergence of a bubble, followed by built up debt seems unlikely. With increased powers given to the Bank of England to prevent debt accumulation, such as stricter mortgage regulations, the boom won’t develop into a dangerous crisis.