Straight from the Specialists
(Any opinions expressed here are those of the author and not of Thomson Reuters)
As I speak with a relatively recognizable British accent, travelling by taxi in many Asian countries has become something of a trial in recent years. Whenever my nationality is recognized, I am (courteously) asked for my views on the London property market, and where to buy. In a world of low interest rates, property has become increasingly fashionable, and somehow housing advice delivered in a British accent has become highly sought after.
Property prices in London are now over 30 percent above their pre-crisis level. For the rest of the UK, house prices are now back where they were before the onset of the economic crisis (it should be noted that the economy is around 13 percent larger in nominal terms over the same period, so the house price to GDP ratio has fallen for the country as a whole). In the United States, house prices have yet to regain their pre-crash levels, but they are up 20 percent from their lows. Even in the Euro area, not an economy noted for its vibrancy, German property prices are 10 percent higher than they were before the crisis.
The increase in property prices is starting to attract the attention of policy makers – certainly in the United Kingdom, where there is a great deal of media focus on the issue. The interesting question is at what point should property prices become a cause for concern for policy makers? As with most issues in economics, there is no simple answer.
Rising property prices, in economic terms, are neither automatically good nor automatically bad. Rising prices of any asset are neither good nor bad – if a price increase means that an asset is fairly valued, it is good, if a price increase means that an asset is unfairly valued then it is bad (a concept that television reporters covering equity markets would do well to learn). A changing asset price should not, of itself, worry policy makers. What will worry policy makers are the consequences of rising property prices. There are four areas of focus.