24^th June 2014

Does this mark the high point

The IMF swept into town a few weeks ago with a message of robust growth. But could this year's prediction be as accurate as last year's, when they took the opposite view.

There were two other items of news that week that would counter this the first was on a rent for room just big enough for a single bed and cooker in Camden London was reaching and second was the BBC was reporting here that the third successive fall in new mortgage approvals. The 'flat' rent was significant for a number of reasons. Not least because such media stories of how much usually mark the high point of a bubble. Bur what marks this out as different is that it relates to rent rather than price and is subject to some regulation by the local authority who have acted. Such actions are signalling to the market, in Central London at least, that property prices for buy to let have reached their limit. The BBC report indicates a similar process is happening with those looking for a home. This just leaves overseas investors as a driver for this sector. Such news will have little impact on Russian Oligarchs and alike who are squirrelling their money away in a safe haven but it could play on the small Asian Investors funding the new builds changing the skyline of London. In the short term we can expect to see a stagnation of prices as local interest falls away but the boom may appear to continue until the promises made to the overseas investors fail to materialise; similar to the experience of those who invested in the riverside properties of the last boom.

This may give the appearance of a soft landing but as I explain elsewhere on this blog and in my book Wealth Creation and Wealth Destruction an economies growth is depending on new money entering the real economy. Some of this will come from savings and investors but typically growth is dependent on the new money created by the interest on loans for which the housing market has been a significant driver recently. Worryingly the BOE paper the BBC report was based on also show that lending in all sectors, with the exception of Utilities and Agriculture is shrinking. On these figure mortgage lending is still outstripping repayments so the housing boom has a little while to run but when it does slows growth will fall.