Telegraph blog on economic policy and house prices

by Dr. Ros Altmann

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I would expect interest rates to go up, the only question is when. The Budget has given the markets more confidence that the authorities are really determined to rein in our out-of-control deficits, so the threat of investors refusing to buy gilts has passed for now. Indeed, sterling has also benefited from the Budget which again eases upward pressure on interest rates.

Further down the line, however, it is inevitable that rates will have to rise. Given the pick-up in inflation that we have seen, rates are too low at the moment. They have been artificially depressed by quantitative easing and fears of non-existent deflation.

In fact, the Government’s change of pension indexation from retail price inflation (rpi) linking, to consumer price inflation (cpi) in order to save costs, confirms that the Government itself expects rates to rise. Cpi will only be lower than rpi if rates go up.

It is difficult to see the housing market rising strongly. House prices are still at very high levels relative to income, so affordability is a real problem for first time buyers. As soon as mortgage rates rise again, many borrowers will struggle to repay and this will also dampen house prices. I think a general rise in inflation will help house prices, but that may be more to stop them falling too much, rather than driving them up significantly.