Follow Joshua McCallum
Why are people so keen to see house prices rise, when housing is one of their biggest expenditure items? Homeowners are happy to see the value of their asset go up but for the economy overall, house prices can only go on rising if every generation is willing and able to pay more than the last. Politicians are anxious to prevent house prices falling but they are in danger of confusing a symptom with a cause – a stronger economy generates higher house prices but higher house prices do not generate a stronger economy.
Ever since the financial crisis, there are many who have claimed that economies like the US are now on a trajectory of permanently slower growth. However, the burden of proof should be on demonstrating why trend growth has suddenly changed its behaviour. Looking at growth over the very long run (back to 1870) is illuminating.
Households in the UK may be forgiven for wondering when they are going to benefit fully from the Bank of England’s interest rate cuts. In 2006, the BOE rate was 4.5% and the variable mortgage rate was 5.5%. Now, with the BOE rate at just 0.5%, the variable mortgage rate has only fallen to around 3%. With all the ill-feeling about the role of banks in the financial crisis, is this just another example of exploitation by banks?
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