Unlike many of my colleagues in the world of public relations, the governor of the Bank of England is not given to overstatement, so when he says what is coming round the corner may not be “nice”, it is time to sit up and listen.
The minutes of the Bank of England's Monetary Policy Committee ruffled feathers in the City last week. Only one vote kept the kept base rate unchanged at 3.5% and it is likely that this will not remain the case for much longer.
Consumer spending has kept the economy afloat, but we are seeing a rise in household debt. A lot of people have failed to heed Barclays boss Matt Barrett's advice about borrowing on credit cards and the temptation to use the extra equity stored in the value of homes has proved too much for many more. The apocalyptic nature of some of the more lurid headlines would lead you to believe that we are about to see consumers who, caught up in a spending frenzy, are about to pay a high price for their avarice. Economists predict that rates may rise to about 5%; however, this will still mean that debt servicing costs remain below their long-term average.
For people worried about an interest rate rise and their ability to pay off debts, there is still time to fix. While many lenders in the market have been anticipating a rise and have priced accordingly, some good deals are still to be found from building societies. The BSA's figures show that lending is still strong and a survey released by Hometrack last week showed that house prices increased in September. John Wriglesworth, Hometrack's economist, says: “The housing market is definitely returning to a buoyant phase, with strong house price rises in most areas of the country, particularly the North-West. Clearly, houses are still affordable for many homebuyers.”
Talking about the immediate future, Wriglesworth goes on: “With interest rates at a 50-year low, lenders have been showing signs of relaxing their lending criteria, with some allowing buyers to borrow over 8x income. Provided borrowers take on medium-term, fixed rate mortgages, such lending multiples imply that future payment commitments will remain relatively low compared with their incomes.
“Continuing low unemployment and strongly positive demographic factors, particularly a fast growing population with an inherent desire to become homeowners, all point to a sustained and healthy housing market. The many doom-mongers who have been predicting a crash over the past two years are looking rather foolish.”
The Bank of England, clearly, is looking to gently curb consumer spending, especially in the run-up to Christmas, but rate rises are not the only option the governor and the chancellor have to temper the housing market.
There was another media brouhaha last week, this time over a story that the Treasury was considering a 40% increase in capital gains tax on the sale of all residential homes. Conspiracy theorists have suggested that this leak was deliberate and done to test the waters. Given the fact that the rumour was slapped down with a rather un-Treasury-like “garbage”, it would suggest that this is not the case and there was genuine annoyance at No 11 about the story. In any case, such a tax would probably be electoral suicide.
What was more interesting was the reaction of a remarkably bouncy Prime Minister at his monthly press conference last week. In response to a question about the rumours, Tony Blair replied that the government never reveals details of the Budget in advance, but “the reason we had to knock down the stuff on capital gains tax was because there was a great swell going round on the basis of a story that was simply wrong”. When pressed on whether the government was looking at the possibility of taxing house sales more, Blair refused to be drawn.
This refusal to rule out other tax rises would suggest that Stamp Duty is being considered. After all, it would appear that there is a £10bn black hole in the chancellor's finances and in order to stick within his own fiscal rules – that the government must not borrow more than it invests over the economic cycle – he has to find it from somewhere.
Labour is not about to draw back from its public spending commitments and given that up to 70% of the population owns at least one house and residential property prices have doubled since 1997, it would be surprising if the housing market was not in the sights of the cash-strapped chancellor.