- House prices seeing double digit growth
- Central banks risk turning asset boom into a bubble
- "history is itself some cause for concern"
Image © Adobe Stock
The UK's double-digit house price increases are just part of a synchronised global asset boom that could be a cause for worry, according to a leading independent economic research house.
Oxford Economics have released research showing the current asset price boom in the UK is the largest in 50 years as house prices, stocks and commodities all move higher in tandem.
UK house prices are growing by 10% year-on-year, as they are in the U.S., Germany and other major economies.
"Surging house prices are part of a broader rapid rise in asset prices, which encompasses commodities and equities. The latter are increasing in advanced economies at the fastest pace (in real terms) since the 1980s. This boom might raise concerns because valuations for some assets," says Adam Slater, Lead Economist at Oxford Economics.
Above: Global house price increases, image courtesy of Oxford Economics.
Oxford Economics say the asset price boom has potentially large impacts on spending and they forecast U.S. household wealth will rise around 20% this year, a record pace, which could add about 2% to consumer spending.
They say the impact on consumption could be boosted by a revival in home equity withdrawal which is already visible in the U.S. and UK following the surge in value of property prices.
Housing equity is the proportion of housing wealth which does not have lending secured on it, allowing house owners to swap equity for money at willing lenders.
Above: Annual change in UK house prices courtesy of Nationwide.
Nationwide this month reported their measure of annual house price growth in the UK reached 10.9% in May, the highest level in nearly seven years.
The survey showed prices were up 1.8% month-on-month following a 2.3% rise in April as a new record average price of £242,832 was set, up £23,930 over the past twelve months.
The surge in the value of UK houses could however contributed to an asset-fuelled bout of unforeseen inflationary pressures.
"Rising asset prices could also be an indicator of inflation risks, especially in the context of loose monetary conditions and other upward pressures. The historical experience is mixed, with asset booms sometimes associated with high inflation but not consistently so," says Slater.
Rising asset prices are to some degree underpinned by significant financial and monetary stimulus from government's keen to increase spending levels to protect against the negative impact of the Covid-19 crisis.
But it is arguably the rapid expansion of central bank balance sheets that are the prime source of the money that is bidding asset prices higher.
With significant quantitative easing and record-low interest rates in place at all the world's major central banks it would appear that the conditions for a continued appreciation in assets remains in place.
Oxford Economics warn however that a policy mistake by central banks could ultimately transform the asset boom into a bubble that eventually pops.
"Loose monetary conditions could push asset prices even higher, risking an eventual sharp correction. For central banks, neither this outcome nor persistently higher inflation are attractive prospects," says Slater.
Research conducted by Slater and his team shows sizeable synchronised asset price booms to be relatively rare and were seem typically in the 1970s and briefly in the later 1980s, and in the mid-2000s.
"That history is itself some cause for concern given that in at least some cases, synchronised booms were associated with high inflation. The potential risk is that they’re a symptom of monetary excess and rising inflation expectations," says Slater.
The UK economic rebound is also likely to provide a fundamental source of support to housing and other UK-domiciled assets over coming months.
The Confederation of British Industry (CBI) have said today they see "a breakthrough year" for the UK economy as they hike their 2021 growth forecast to 8.2%.
In their mid-year forecast for the economy the CBI say they now expect the UK economy to be back to pre-covid levels by the end of the year courtesy of the 8.2% growth rate, while GDP will grow 6.1% in 2022.
This is up from 6.0% and 5.2% respectively in their previous forecast.
The upgrade means the economy will have recovered to pre-Covid levels a full year earlier than had previously been forecast in December 2020.
"There are really positive signs about the economic recovery ahead this year and next. The data clearly indicates that there is pent up demand and ambition across many sectors," says CBI Director-General, Tony Danker.
Whether or not the current asset price boom is sustainable or not could ultimately depend to what extent these economic fundamentals trump the easy money being created by central banks.