London House Prices Masking UK Economic Woes
House sales in London enjoyed the best rise in prices for five years in January. New Year sales in the capital picked up considerably and resulted in a 3.5 per cent increase on house prices in December 2012. House price in the UK capital are up to an average of £480,890, a 9.7 per cent increase in comparison to the same time last year.
One of the reasons for the upsurge of house purchases in the capital is due to executive housing developments along Canary Wharf and the old Battersea Power Station – the latter attracting wealthy foreign investors who are splashing out around £6m on the luxury apartments. Meanwhile they are driving house prices up across the city. According to recent National Statistics, house prices across the UK also saw a 0.2 per cent rise but this could just be a reflection of the steep rise in London.
It is estimated the new properties make up for 29 per cent of sales and housing market analysts representing Rightmove feel the influx will balance supply and demand. Not if they are all been snapped up by Europe´s elite as investments they won´t! Foreign investors with concerns about the unstable economic situation in the Eurozone and China helped to boost the value of London house prices in 2012. Meanwhile, many British families formerly living in London moved in boroughs in the South-East.
UK house prices predicted to climb
A new report published by the Centre of Economics and Business Research predict house prices in the UK will enjoy a 0.8 per cent increase this year and surpass the 2007 pre-crisis peak in 2014. The government backed Funding for Lending Scheme which makes loans available at affordable rates has returned confidence in the market, but is another economic crisis waiting to happen.
Critics of the scheme claim the banks have been given too much control over low-interest loans and the scheme is open for corruption. Low repayments on the loans expire after four years and could leave borrowers struggling to meet repayments. When the bubble bursts the crisis floods the country.
The steady increase in house prices since the FLS was introduced in August 2012 helps the statistics appear that the economy is growing and Britain is finally recovering from a double-dip recession. In comparison however, the British Retail Consortium published a survey which revealed one in five British families cut back on their Christmas spending last month – a fairer reflection on the economy than a rise in London house prices purchased by wealthy investors seeking profitable rentals in the UK.
Bank of England Quiet on UK Interest Rates
The Bank of England´s Monetary Policy Committee (MPC) has been noticeably quiet lately after receiving criticism about the stance on interest rates. The UK base rate has been held at an all time low of 0.5 per cent since March 2009 and a report issued by the bank in November indicated interest rates would not be lifted at least until the end of 2013.
The banks stance has received heavy criticism and are being urged to increase interest rates sooner rather than later. Attempts to boost the economy with £375bn of quantitative easing did little for the country other than the wealthiest ten per cent. Financial commentators are getting restless with the lack of alternative action the bank is prepared to take.
The desperate financial crisis that is wreaking havoc in the Eurozone is not helping Britain´s cause in terms of export and import – or at least that´s what the papers say. Official UK statistics tell a different story valuing UK trade exports rising by £0.1 billion, and imports falling by £0.1 billion. That means the UK is selling more than they are buying.
How will US policy affect UK interest rates?
Across the pond, the US Federal Reserve has announced it does not plan to raise interest rates until unemployment falls below 6.5%. The US economy is in an even worse state than the UK and the FED are holding interest rates below 0.25 per cent whilst at the same time using the same quantitative easing methods that have failed in Britain.
Given the codename, Operation Twist, the FED has already bought $85bn (£53bn) worth of government bonds and mortgage-backed securities. Operation Twist was first trialed by J.F.K in 1961 and although it did reduce the long-term interest was still labeled a “gimmick” because the economy was improving anyway.
The central banks in the UK, US and in the Eurozone are using QE to encourage credit spending and monetary expansion. The results are intended to moderate the pressure caused by debts incurred through overseas trading. Although it QE has failed in the UK thus far, the economy is nonetheless slowly recovering – except it is doing so naturally as businesses did not bite the banks cherry.
Last August the bank launched the Funding for Lending Scheme which is designed t encourage banks to lend low-interest loans to small businesses and home owners. The corporate money men didn´t take the bait so the bank has turned its attentions to the general public. FLS has also received criticism from economists and the scheme does suggest we will be heading for another financial collapse before the end of the decade. Meanwhile the bank remain resilient about keeping UK interests low and have gone quiet because economists have unveiled their plans for financial failure.