U.K. Chancellor of the Exchequer George Osborne should scale back his housing-market stimulus next week to prevent prices spiraling, according to a survey of economists.
Almost three-quarters of 33 analysts in a monthly survey by Bloomberg said property in the U.K. is at risk of overheating. The poll, published today, also showed that more than 80 percent said Osborne should use his March 19 budget to curtail the Help-to-Buy program, which allows people to buy a home with a down payment of as little as 5 percent.
“House prices are already in frothy territory,” said Philip Rush, an economist at Nomura International Plc in London. Help to Buy “is encouraging a worsening of fragilities, creating the illusion of wealth by subsidizing house prices and encouraging a further leveraging up.”
Introduced by Osborne a year ago, the incentive program has helped boost mortgage lending. This stimulus, combined with a strengthening recovery and record-low interest rates, has bolstered demand for property and fueled concern that a bubble may be forming. A report from Acadata today showed house prices soared the most in almost two years in February as London continued to power growth.
While the program has stoked the market, Rush said politically it wouldn’t make sense for Osborne to curtail it before next year’s general election. The chancellor has said the plan is helping “aspiring families” to own a home.
Acadata said all 10 regions its tracks registered annual home-price growth in the most recent three months, with London jumping 10.9 percent. Bank of England Governor Mark Carney, who ended his institution’s support for housing loans this year, said on March 11 that officials “have to be alive” to the possibility that rapid increases will spread beyond the capital.
“In London, the market clearly is overheating, but the rest of the regions aren’t benefiting as much,” said Brian Hilliard, a former BOE official who is now an economist at Societe Generale SA in London. “Osborne will be reluctant to do anything. The increase isn’t just caused by Help to Buy, it’s caused by other factors, like foreign buyers, too.”
Economists in the Bloomberg survey were divided over how Osborne should scale back the stimulus. Twenty-eight percent said he could increase the minimum size of down payment needed to access the program, while 25 percent said Help to Buy should be restricted to first-time buyers.
Twenty-two percent said the chancellor should lower the maximum price of houses that can be bought with the plan’s help from 600,000 pounds. According to the statistics office, the average U.K. house price in December was 249,792 pounds. In London, the average was 449,551 pounds.
Asked when the BOE will begin raising interest rates, 53 percent predicted the first half of 2015, little changed from last month’s survey. In the survey, 58 percent of respondents said Carney’s forward guidance on rates has been effective, up from 46 percent last month.
Economists have become more optimistic about the outlook. The economy will expand 2.7 percent this year, according to the median estimate in the poll, up from 2.6 percent last month. In 2015, growth will slow to 2.5 percent. Inflation will be 1.8 percent at the end of this quarter and average 2 percent this year, the economists predicted.
Construction increased 1.8 percent in January from December, when it rose 2 percent, the Office for National Statistics said today in London. While the statistics office said it revised construction in the fourth quarter to a 0.2 percent decline from a previous estimate of 0.2 percent growth, it said the revision won’t have an impact on Britain’s GDP.
“Growth was certainly strong the past quarters,” said Duncan de Vries, an economist at Nibc Bank NV in The Hague. “Prospects remain very uncertain as a consequence of the highly-indebted economy.”