The UK housing market has been grossly overinflated by low interest rates, freezing out the young
Many savers, particularly the elderly, continue to complain about the low interest rate environment, and how it has damaged their income and even wealth. At the same time, many of those trying to get on to, or climb, the housing ladder, complain bitterly about the way high asset prices, which are a by-product of the low interest rate environment, have locked them out.
It is time the Bank of England bite the bullet, stop worrying about the damage to growth, and raise interest rates, say to 3pc. The impact of this will be that, cash savings would again yield a real rate of interest and there would be a massive correction in house prices, with highly leveraged borrowers and buy-to-let landlords forced to dump their properties on the market at fire-sale prices. As things stand, property has become virtually the exclusive preserve of those who already own it. Ultra-low interest rates are a large part of the reason.
There is no prospect of the Bank of England implementing such a strategy. The supposed damage it would do to demand is a powerful deterrent. The last thing the Bank of England wants to do is induce another recession. Furthermore, the Bank is already struggling to achieve its 2pc inflation target; to raise interest rates significantly now might plunge the whole economy into a deflationary spiral.
Very low interest rates plainly make no difference to the propensity to invest, so there is no reason to hold them low for such a purpose either. Business investment is still at a very low ebb, despite rock bottom rates, with many corporations continuing to pay down borrowings, rather than expand.
Admittedly, households are a different matter. Many would be badly hit by a steep rise in mortgage payments - although not so much in terms of default. That's because, whatever else they cut back on, UK households will go to hell and back to keep up their repayments. What it would do is damage disposable incomes and that, in turn, would hit demand.
The upside, however, is that higher interest rates would knock house prices, and thereby reset the market at a more affordable level. Housing transactions have picked up a bit of late, but are still a pale shadow of what they were before the crisis hit.
Any interest rate hike plainly involves trade offs, yet not sure the downside risks are so great as to justify the present dearth of debate over the matter. House prices are too high relative to incomes. Of that there is no doubt. This may be primarily an issue of deficient supply, but low interest rates are also quite obviously a large part of the reason.
True enough there are some cautionary stories out there on the dangers of raising rates too early, notably from Sweden. There, rates were hiked to deal with a house price bubble, only to plunge the economy into deflation without making much of a difference to house prices.
On the whole, central bankers prefer other tools - so-called "macro-prudential" regulation - to the blunt instrument of interest rates to control the housing market. However, with UK house prices still rising at rates way above either inflation or wages, it doesn't seem they are working very well. If by "macro-prudential" we essentially mean credit controls, this doesn't much help aspiring buyers in any case.
As already mentioned, raising interest rates significantly is not without its risks. Even so, a kind of blind consensus reigns over the need for ultra-easy money, while ignoring its deeply negative long-term consequences. At the very least, the alternatives to ever lower interest rates merit examination.
We cannot go on indefinitely with a situation where the young are permanently frozen out of the housing market by the growing wealth of their parents and buy-to-let landlords.