The U.K. economy will grow faster than previously forecast as a pickup in house prices stokes consumer spending, according to the National Institute of Economic and Social Research.
Gross domestic product will expand 1.4 percent this year and 2 percent in 2014, a 0.2 percentage-point increase for each year, London-based Niesr said in a report published today. Forecasts for annual house-price growth in 2014 were raised to 5 percent from 0.5 percent, adding about 0.5 percentage point to spending projections.
“The housing market has thawed quite noticeably by almost every measure you want to look at,” Simon Kirby, an economist at Niesr, said at a press conference yesterday. “We’ve got quite a buoyant housing market compared with the previous few years. That feeds through and has a knock-on effect to our consumer-spending growth forecasts.”
The impact of the government’s Help to Buy program, which aims to help more Britons onto the housing ladder, is “highly uncertain,” though it poses an “upside risk” to house-price forecasts, Kirby said. Prime Minister David Cameron accelerated the initiative last month, raising concerns that it’s stoking a property bubble.
House-price growth picked up in October, rising 1 percent from the previous month and 5.8 percent from a year earlier, according to Nationwide Building Society. Hometrack Ltd. said last week prices in England and Wales rose 3.1 percent from a year earlier, the biggest gain since 2007.
Help to Buy allows people to buy homes costing as much as 600,000 pounds ($957,000) with a 5 percent down payment. The program began in April with interest-free loans for buyers of newly built properties and the second phase -- mortgage guarantees covering all homes -- was brought forward to last month from January.
The plan has drawn warnings from the International Monetary Fund, and former Financial Services Authority Chairman Adair Turner said last month that Britain risks a repeat of the debt-fueled binge that led to the credit crisis.
“I don’t think any of us are fans of Help to Buy,” said Jonathan Portes, director at Niesr. Angus Armstrong, an economist at the institute, said “the design of it is so wretched, that’s what’s depressing about it.”
“Banks have an incentive to loosen underwriting requirements for mortgages,” Armstrong said. “If you’re going to intervene in the mortgage market there are a lot better ways to do that,” such as through the mortgage-backed securities market, he said.
Growth based on consumer spending is “unsustainable” because it’s based on the housing market rather than increases in real incomes, and it’s coming at the expense of household saving, Kirby said. Significant contributions from business investment and trade won’t start until 2015 and 2016, respectively, he said.
Unemployment, now at 7.7 percent, will fall below 7 percent at the start of 2016, though there’s a one-in-five chance it will reach that level in the first quarter of next year, Kirby said. A 7 percent jobless rate is the threshold at which Bank of England policy makers say they’ll consider raising the benchmark interest rate, provided none of the three “knockouts” in their forward-guidance policy are first triggered.
Kirby said that the knockout related to financial stability risks will probably lead to a rate increase in the second half of 2015. The caveats related to inflation forecasts and inflation expectations won’t be triggered, as inflation will drop to the bank’s 2 percent target in the first quarter of 2015, he said.