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The Chancellor is banking on another house price bubble



By Jeremy Warner   Telegraph

Household debt is set to soar way above pre-crisis levels. Will Britain ever end its addiction to credit?

The most depressing chart in the Office for Budget Responsibility's latest "Economic and Fiscal Outlook" is this.

What it essentially shows is that after more than six years in the doldrums, the economy is set to return to the way it was before the crisis, with gross household debt to income rising to new records of around 190pc by the end of the next parliament.

To the extent that this happens, it is expected to be caused not so much by debt-fuelled consumption, or not directly in any case, but by rising house prices. These require households to take on progressively larger mortgages in order to play the home ownership game.

The Chancellor's stamp duty reforms, substantially reducing the transactional costs of buying a house for the vast majority of such purchases, puts another rocket under this debt-propelled rise in house prices. "In total", the OBR says, "house prices are expected to rise by 31.4pc by the first quarter of 2020.

"Relative to their pre-crisis peaks in 2007, real house prices at the end of the forecast [2019/20] would be 8.8pc higher and the ratio of house prices to average earnings 9.5pc higher". We seem to have been put in a time machine and returned to 2007.

There is a sense in which this rise in household indebtedness is only the mirror image in macro-economic terms of the Government's efforts to reduce the deficit. If the Government is reducing the amount it borrows each year, other sectors, and particularly households, must increase it to stop the economy contracting. Furthermore, the OBR assumes that the current account deficit - broadly the difference between what we earn and what we spend as a nation - will fall from close to 5pc to little more than 1pc.

That's quite an assumption, and as long as the eurozone remains hell-bent on its current deflationary bias, thereby dumping its surpluses on us, it's very unlikely. In any case, if the current account deficit doesn't fall as forecast, the rise in household indebtedness would have to be even greater in order to sustain the assumed rate of growth.

Very low interest rates make big mortgages much more affordable than they used to be, but it really is deeply depressing that the economy as a whole must continue to pile on debt in order to keep the show on the road and counter the eurozone's macro-economic madness.

Some people argue that all that debt doesn't matter very much as long as it is dwarfed by the value of the assets, which it certainly is as far as the household sector is concerned. Wealth far exceeds debt. What the crisis has taught us, however, is that high levels of household indebtedness make countries particularly prone to financial and economic crisis. This is because whatever else they do, households will always move heaven and earth to keep up with the mortgage payments and forestall repossession. Other forms of expenditure will get cut to the bone in order to keep the house, causing demand to collapse.

Gordon Brown promised to end boom and bust, and in his own way, George Osborne promises the same. Would that it were true.

PS. A closer reading of the OBR's economic and fiscal outlook reveals that the OBR is expecting not just a big increase in mortgage lending, but a renewed surge in unsecured consumer and credit card lending as well. This truly is back to the future. Not good, not good at all.

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