Oil prices up, house prices down- the UK on Nightmare Row

Oil prices rose and house prices fell again yesterday. It is the government’s nightmare scenario. They have left the UK short of energy by failure to make early enough decisions on replacement power stations using non imported fuel, and through their wish to tax the North Sea oil province too heavily, discouraging more production. They well know how important house prices are to consumer confidence and jobs in the UK economy, let alone to voter attitudes.

Both subjects were on my agenda in Parliament yesterday. At lunch time HBOS came in to tell any MPs interested what they thought was likely to happen in the UK housing market. Last time they had dropped by I had found them wildly optimistic, anticipating little change in house prices. This time they were gloomier, forecasting a 9% fall in the average price of a home in 2008. I still think that is looking on the bright side. HBOS argued that the supply of houses would remain tight, thanks to a collapse in housebuilding, against a continuing lively pace of immigration and divorce generating more demand for households. I reminded them that fewer migrants will come if the economy gets grimmer, whilst divorce and migration only translates into demand to buy homes if the mortgages are available so people can afford them.

Anecdotage tells me that some sellers of houses are now beginning to cut their prices by rather more in a desperate attempt to find a buyer. For several months the market has held its values better than might have been expected, because there have been precious few transactions. Sellers have held out for the original price, and buyers have simply stayed away. Gradually some sellers will decide they have to take whatever price is available, and a few more buyers will be tempted by significant price cuts. One friend of mine has cut the price by more than 20% and still has no takers. Another cut by almost 15% and found a buyer. Meanwhile mortgage offers have more than halved. Banks are understandably cautious, lending a smaller proportion of the price, expecting a more cautious valuation and seeking a higher margin through a higher interest rate. That’s what a Credit Crunch is all about, and that’s what the government and Bank of England said they wanted when they warned banks to be more careful last summer. Sometimes governments should be careful about what they ask for, in case their wish comes true. This blog said at the time the authorities would reap a bitter harvest from their approach to money markets last autumn. It is not going to make the banks more popular, but it will strengthen their solvency and repair some of the damage to their profitability.

Back in the Commons Chamber in the afternoon we had the opportunity to debate the government’s wish to charge people more for owning a car. The absence of most Labour members, and the fears of some of the few who came spoke volumes about their underlying concern. They must know that the plan to increase Vehicle Excise Duty substantially on older cars that emit too much CO2 is seen as unfair, and on their own figures is not a green policy as it achieves practically no reduction in CO2. Most people are stuck with their older vehicles, especially now the price of them is falling to reflect the higher running costs form the higher tax in prospect. The Conservative Opposition offered them a way out, seeking to stop the government from going ahead, but the Labour MPs declined the life line.

For most MPs it’s not easy being a rebel. You are pulled between remembering that your party allegiance accounted for a large part of your vote at the election, and the strong view that your party is making a big mistake which is letting down the voters. On 42 day detention more Labour MPs felt that the principle of the issue mattered and they should vote with their consciences. They had not signed up to eclipsing important civil liberties. On higher taxes they are uneasy because they can see how unpopular they are, yet individually they are drawn to support their party out of their instinct that higher taxes are good. On Tuesday the rebels over the abolition of the 10p band accepted a weak formula to look again at compensation for losers from the Minister and backed off their tabled amendment. On Wednesday the possible rebels on VED did not even table an amendment and returned to tribal loyalties as they queued up to distance themselves from the amendment the Conservatives had tabled.

In each case the rebels felt better for rejoining their party in the Commons – it makes for easier relationships with colleagues. A long summer back in the constituency may serve to remind them just how toxic these higher tax policies have become, bearing down especially heavily on those on lower incomes. Then they may remember why they felt they should rebel – the government is destroying their chances of re-election if they have marginal seats, and hastening the day they will be out of government if they have safe seats. It is now the economy, stupid, which will determine the government’s chances of re-election. If they do not do something soon to lower inflation and ease the squeeze on incomes, they are doomed.
So far the government seems set on intensifying the squeeze on all of us by increasing taxes, whilst spending yet more and more money they do not have in the public sector. Today sees at last the signatures on the contracts for two large aircraft carriers. It is doubtless a coincidence that this brings work for Glasgow ship yards at a time when we are fighting a Glasgow by-election.

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10 Comments

  1. APL
    Posted July 3, 2008 at 8:14 am | Permalink

    JR: “Sometimes governments should be careful about what they ask for, in case their wish comes true. This blog said at the time the authorities would reap a bitter harvest ..”

    Mr Redwood, at one point I was very concerned about inflation, not unreasonable (I think) since inflation has been a tool of government ever since I can remember taking an interest in such things and before.

    What I think we need to worry about now is not inflation, but deflation. Yes, there is inflation in some things – oil (which may be a signal of tight supply) but the massive loss of ‘value’ in the housing market, and now in stocks and shares indicates a very large net contraction of money and credit not only in the UK economy, but across the western world.

    Thanks to Labour we, as a country, could barely be in a worse economic condition to weather the closing storm since the last financial tsunami in 1930.

    Within a few years, how much CO2 you produce will be the least important thing to the vast majority of people.

  2. Tim
    Posted July 3, 2008 at 9:45 am | Permalink

    I wonder how government reciepts are holding up with the reduced volume of housing sales. Surely this would be a good time to try and stimulate the market by reforming stamp duty last week RICS put forward proposals to make stamp duty less onerous by ensuring if you purchased a property of say £300,000 you would pay 1% stamp duty to £250,000 and the higher rate of 3% on the amount above £250,000.

    Such reforms would ensure the distortions caused by the stamp duty thresholds are removed and reduce the transactional cost of buying a home.

  3. Cliff
    Posted July 3, 2008 at 11:10 am | Permalink

    Two observations;

    1) We hear commentator after commentator telling us it's all doom and gloom and that we are going to see house prices fall by thirty or forty percent. Now is it not the case that we are effectively talking ourselves into a recession?
    If you were considering buying a house today, would you? Or would you wait to see if the prices fell even more over the months to come? If you bought a house today, is it likely to be worth less next month and the month after? If we believe the doom mongers then the likelihood is that it will be worth less so, no sensible person would buy would they? It's a self-fulfilling prophecy.

    2) The AA recently published a report about diesel cars and the costs of running one and owning one.
    The report said that a couple of years ago, given the dearer cost of buying the diesel vehicle, (compared to a petrol vehicle) the cost of diesel and the increased miles per gallon, the diesel car was economically beneficial should you do 12000 or more a year. The figures for today suggest that you need to drive more than 40000 miles for a diesel car to be more economic than a petrol model.
    The juxta position is that the green brigade say that diesel is better for the planet, and yet the government, that claim to be sold on the green agenda, continue to make diesel more and more expensive. Diesel was always cheaper than petrol as it was a by-product of the petrol making process.

    One other thing I have noticed is this; Reporters on the BBC seem very gleeful when reporting the down turn in house prices or money being wiped off shares etc…….Do you think that is intentional?

  4. anon
    Posted July 3, 2008 at 1:09 pm | Permalink

    What do you make of Craig Murray? Have you read his book (Murder in Samarkand)? If so, do you have an opinion about it?

    What do you make of this article re Andrew Mackinlay?

  5. Derek
    Posted July 3, 2008 at 1:45 pm | Permalink

    Agree with all of this. I give it a maximum of six months before it's openly discussed on the news how too many flats and houses have been built, contributing to the collapse in prices. Anyone can see any small bit of land in towns and villages has been built on. I've never been convinced the demand was really there in the absence of cheap money.

  6. David morris
    Posted July 3, 2008 at 2:44 pm | Permalink

    John

    You are clearly describing some other parallel world to Planet Brown. He seems to believe a group of hauliers merely fancied a day out in London.

  7. Rose
    Posted July 3, 2008 at 6:49 pm | Permalink

    Why are we so wedded to high house prices? They have turned women into wage slaves and made them get cars they wouldn't need if they weren't having to go out to work and rush around ferrying children hither and thither to get them off their hands. They have gobbled up billions in investment which should have gone into other more constructive things. They have lulled people into spending money they haven't got. They have persuaded people to buy who would have been content as carefree tenants. In distorting the economy and the tax system (e.g. double mortgage tax relief was a disaster) they have made everything unbalanced, and if it weren't for all of that we would be better placed now to cope with the world-wide difficulties we face. Or have I missed something?

  8. bill Quango mp
    Posted July 3, 2008 at 9:31 pm | Permalink

    The carrier contract signing was imminent, but it does Labour no harm to ensure it is signed before the by election.
    More worrying is where is this money coming from. Des says it won't impact on other spending commitments, but it seems the military are not so sure.

    Transport planes, spy planes, decent armoured personnel vehicles and transport helicopters are needed immediately.

    The 2 carriers need the type 45 destroyers, the new nimrod anti submarine plane and the astute nuclear submarine to protect them. Seems like an awful lot of shipbuilding has gone on under Mr Brown's watch.

    232 Eurofighters planned for the RAF. 232!! who would we fight with that many air-to-air planes? America? China?

    Iraq and Afghanistan..what is there aircraft capability again? Is it erm, zero? Yet we need to pretend that the Eurofighter is necessary so that it wasn't another unbelievably enormously expensive Euro project failure. So buy enough of them that the unit costs go down.. even if 1/3 will be left in hangars unused.

  9. Letters From A Tory
    Posted July 4, 2008 at 10:39 am | Permalink

    Although the fall in house prices has brought many buyers back into play after years of being in the wilderness, the withdrawal of mortgage deals has stifled the market. Once one bank makes a break for it and starts offering competitive deals again in the coming months, the housing slump will be turned on its head.
    http://lettersfromatory.wordpress.com

  10. christoff
    Posted July 21, 2008 at 7:43 pm | Permalink

    I have sold my house in surrey and have £270000 in the bank,
    I need advice on if to buy or wait and see if prices drop further?

    any help much appreciated.

    Reply: I am not allowed to give investment advice through this site. There are a number of surveying and estate agency companies that do make forecasts of future house prices. It also of course depends on whether you need somewhere to live and what your other options are for that. Your sums need to take into account transaction costs, rental costs if you need to rent instead of buying immediately, and the return you estimate on your cash, as well as incorporating a sensible forecast of future house prices in the area where you want to buy. There are professionals in the mortgage and property areas who could help you make this decision.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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