Why booming property markets spell good news for the Chancellor
Good news, like bad, seems often to come in threes, and today was no exception. Not only have we learnt (from the CBI) that the industrial sector is expanding at the fastest rate since 1995 and (from the DCLG) that construction of new homes is finally starting to pick up (growing at the quickest pace since 2008), the public finances also, at last, seem to be on the mend.
Of course, it’s a sign of the times that it has become rather difficult to imagine the public finances looking rosier. For year after year during the Gordon Brown era, the Treasury turned in deficit after deficit – each one worse than the previous year’s Budget had forecast. Then, after the crisis, the deficit ballooned to an enormous size as tax revenues collapsed and the cost of mitigating the recession weighed on the public purse.
The upshot is that at present Britain’s national debt is at its biggest size since the 1960s (when it was on the way down after World War Two). However, having reached a 45-year high of 75.9% of GDP in September, it actually fell a touch in October, according to the latest public finance numbers from the Office for National Statistics.
Now, admittedly this was something of a blip: the national debt will continue to climb in the coming months as the Government continues to borrow in quantities which are still enormous by historical standards. However, the big news is that slowly but surely the public finances are starting to improve.
In the Budget earlier this year, the Chancellor forecast that he would borrow £120bn this year. Today it emerged that so far this year it has borrowed £64.8bn (on a comparable basis). Where has the improvement come from? The short answer is a combination of lower-than-expected spending (up by 2.1% since April, despite a 5.4% increase in interest payments), and stronger tax revenues. VAT receipts are up by 5.8%, reinforcing the suspicion that people are starting to spend again; income and wealth taxes are also up 3.5%, while the corporation tax is down 2%, but that figures, given the main business tax rate was cut this year, and that there have been shutdowns in the North Sea.
However, the most eye-catching detail of all is the increase in revenues from stamp duty, which are up 45.9% on last year. This is largely down to the prime London property market, which has seen enormous increases in prices over recent years. In fact, it turns out that the monthly receipts from the tax are now running at the same level they were just before the bubble went pop in 2008.
And while this is at least partly down to higher stamp duty rates, it will raise uncomfortable questions: are we heading for another bubble? Is the Chancellor complicit, particularly given it both boosts his budget and the broader sense of economic recovery? The answers, such as they are, are not simple. The chart below of property transactions hardly screams bubble – but then again, as we’ve covered time and again in recent months, what we’re experiencing in the UK is a number of micro-bubbles in various different spots (Kensington & Chelsea, Westminster etc) rather than a nationwide bubble.
Those micr0-bubbles are troublesome for anyone wanting to buy property in smart bits of London, but they are hardly a broader issue for the country’s financial stability, which is why it’s too early to expect the Bank of England (whose Financial Policy Committee has jurisdiction here) to do anything about it.
Today’s flurry of data underlines the nature of the economic recovery. There is a solid, strong economic recovery taking place right now, and most parts of the economy are seeing evidence of it. The CBI survey is further evidence that even the manufacturing sector is doing well again.
However, it’s hard to ignore the fact that the one sector that is booming more than any other is the property market and lenders. The big question is whether, leaving aside those mini-bubbles, the rest of the country is starting to froth up again too. Certainly, activity is beginning to increase; encouraged by record low interest rates and a swathe of Government policies, Britons are borrowing again, and are buying property again. However, it’s very early days.
All the same, what’s now clear is that it’s helping George Osborne’s bottom line; it’s also helping push the country towards a recovery. But for most economists, who believe the UK is already highly-indebted and house prices are already too high, or high enough, the worry is that this recovery is yet another sugar high which will lead, some years later, to another slump.