Teresa Hunter: Handle interest rates with care to avoid double dip

Published on Saturday 30 January 2010 14:24

HOUSE price inflation looks set to reach nearly 11 per cent next month, after consistently low interest rates triggered a mini property boom. And they are likely to continue rising over the coming year, after weak economic figures.

The Bank of England meets this week to decide where interest rates go from here. But there seems little prospect of any increase either now or in the months to come after the government's statisticians all but failed to find a heart beating in the economy. After 18 months of recession, growth continued to defy electric shock treatment and ticked up a stunning – for all the wrong reasons – 0.1 per cent.

So the Nationwide house price news was particularly welcome. It reported a 1.2 per cent rise in property inflation in January, pushing values nearly 9 per cent higher than a year ago across the UK, setting them on course for a nearly 11 per cent rise in February.

How can this be, with the economy still flat on its back, falling wages and high unemployment?

Low interest rates and new rules on repossession have combined to bring new buyers into a market which has not, as in previous recessions, been flooded with forced sales. The experts say the shortage of quality property is pushing up prices, but I prefer to put it another way. If you have a desirable home and don't have to sell, why would you accept the sorts of deeply discounted offers associated with the 2008 crash? In other words the market is finding a realistic level.

And you may well be glad you held on. New building has ground to a halt. If we had a shortage of property before the crisis, there will be a considerably bigger one in the years ahead.

That's not to say property is a one-way bet, although a 9 per cent return looks more attractive than sticking money in a bank account. Potential booby-traps abound.

The Bank of England must also this week decide on whether to shut their funny money machine, as expected. Given the state of the economy, it's debatable whether the quantitative easing made any difference. But certainly there are months of fiscal and monetary tightening ahead.

If whoever forms the government after the next general election is serious about tackling the nation's debt, then taxes will rise and there could be job losses in the public sector.

This could cause a reversal. Yet ironically, interest rates would stay low in such an environment, so another crash could be avoided.

The biggest risk of a double dip will emerge when interest rates begin to rise again. Too far too fast and we'll have problems. But if they edge up slowly, we may survive even that storm.

Question time

THE debate over the shape of banking continued to rage last week, with key industry figures speaking at the Davos economic summit, speeches from Chancellor Alistair Darling and FSA boss Lord Adair Turner and Bank of England chairman Mervyn King grilled by the Treasury Select Committee.

The argument over whether radical reform of regulation or structure is the way forward raged on. But for me, the answer lay not in their cleverly constructed theses, but in the cross-examination of various legal witnesses in the Chilcot Inquiry into the invasion of Iraq.

It was a salutatory reminder of the limits of the effectiveness of controls on ambitious and strongly motivated individuals.

Home truths

WATCHDOGS should be praised for clamping down on shady mortgage-to-rent schemes, which promise to solve hard-pressed homeowners' financial problems only to turn into an even worse horror story. Although we might ask: is it not too little too late?

These schemes, which are often sold using high-pressure door-step techniques, offer to buy your home, let you live there for an affordable rent and buy it back at a reasonable price when your financial position improves.

The reality for those sucked in is soaring rents, eviction and discovering the buy-back promise is not worth the paper it is written on.

From 30 June, schemes must offer those who sign up five years' security of tenure, a 14-day cooling-off notice, and high-pressure selling is banned. We'd say there is still a step further to go to protect vulnerable home owners.

Dodgy tax

TAX coding notices should begin dropping onto the door mat about now, and it will pay you to take a close look, as we report on Page 9. Not only are these routinely incorrect, leading to millions overpaying tax each year, but the government has come up with a cunning plan to make you pay tax early on money you have yet to earn.