Forever blowing bubbles?

By Mike Peacock
October 22, 2013

UK finance minister George Osborne is speaking at a Reuters event today, Bank of England Deputy Governor Charlie Bean addresses a conference and we get September’s public finance figures. For Osborne, there are so many question to ask but Britain’s frothy housing market is certainly near the top of the list.

The government is extending its “help to buy” scheme at a time when house prices, in London at least, seem to be going through the roof (no pun intended). Property website Rightmove said on Monday that asking prices for homes in the capital jumped 10.2 percent in the last month alone.

The Royal Institution of Chartered Surveyors has suggested the Bank’s Financial Policy Committee should cap house price inflation at 5 percent a year. A Bank of England policymaker retorted that it wasn’t down to his colleagues to regulate prices.

Osborne has give the Bank a say on pulling the plug on his scheme early but not until September next year. Overnight, the RICS property industry body said house building in Britain is making its strongest recovery in more than 15 years, but supply is still failing to keep pace with demand.

The government and Bank of England insist there is no sign of a bubble inflating but one only needs to look at the volatile history of Britain’s housing market to see why there is widespread concern.

Nor is this confined to Britain. The Bundesbank warned yesterday that house prices in big German cities are starting to get well ahead of fundamentals – already by as much as 20 percent. Within the euro zone, it was the bursting of property bubbles that plunged Ireland and Spain into crisis.
Further afield, China’s home prices rose the most in nearly three years in September. Average new home prices in 70 major Chinese cites climbed 9.1 percent year-on-year.

As for Britain’s debt figures, a pickup in the economy could mean Osborne beats his budget target this year for the first time since he entered the Treasury in 2010. GDP figures on Friday are forecast to show robust 0.8 percent growth in the third quarter, after an unexpectedly strong 0.7 percent increase in the second.

For the markets, starved of U.S. data by the government shutdown, it will be difficult to look beyond today’s delayed U.S. non-farm payrolls as investors refocus on the Federal Reserve and whether it can begin withdrawing stimulus before the year-end given another Congressional debt standoff could flare up early in 2014.

Slovenia appears to be approaching the moment of truth when it has to decide whether to seek a bailout to put right its banks which are beset by 8 billion euros of bad loans – almost a quarter of the entire economy.

Today, Slovenian central bank governor Bostjan Jazbec is expected to address that head on at a business conference. He has already said outside help may be needed if the country’s borrowing costs don’t fall but the prime minister says not, as did Jeroen Djisselbloem, the Dutch finance minister who chairs the Eurogroup of euro zone finance ministers, after talks in Ljubljana yesterday.

Slovenia plans to recapitalise its banks later this year or in early 2014 after it gets results of stress tests, which are expected by the end of the year.

Madrid sells up to 3.5 billion euros of short-term treasury bills, no problems expected there. But pressure remains intense in Italy, focused on a 2014 budget which looked worryingly modest in scope but has aroused ire from all quarters.

Italy’s three main trade union confederations said they will hold rolling strikes and protests. For the euro zone, much rests on Italy’s ability to make its economy fit for the 21st century.

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