What a difference a year makes. In May 2007, the professionals completing the RICS estate agents’ and surveyorsâ€™ survey of the residential property market were bullish on past property price rises and the prospects of more to come. That May survey showed a positive balance of 21 for past prices UK-wide, and a big 56 positive balance for London. New-buyer enquiries were in balance. The latest figures in 2008 show a negative balance of 95 on past prices UK-wide and a negative 94 on London. The business has never been more pessimistic, with practically every agent reporting prices down and expecting more of the same. New-buyer enquiries have reached early 1990s levels, at minus 68. Even the Housing Minister has to go to cabinet with a pessimistic forecast for house prices, and kindly lets the rest of us read what we already know from the public surveys.
This week also brought the expected bad inflation figures. Energy and food prices have boosted CPI and RPI inflation, with the governmentâ€™s alcohol duty increases and VAT on petrol and diesel offering the extra boost to the rise. Readers of this blog will not be surprised by either development, following pieces on the coming drop in house prices and the short-term up-tick in inflation. Shop-price inflation is still much less than factory-gate inflation, which is far below the inflation in metals and energy used by the factories. Everyone is having to absorb higher prices to some extent. The consumer is unable to protect himself or herself through sufficiently large wage increases, so spending power is falling.
The UK is now paying the price of government and regulatory excess in recent years. The government sector has inflated its costs and borrowed too much. As a result, the UK government had to increase taxes at exactly the point in the cycle where it should be cutting them. The Bank of England is having to keep interest rates much higher than our leading first-world competitors, because the inflation here is exacerbated by tax increases and the sloppy credit conditions of recent years. The nationalisation of Northern Rock has left the government short of cash to improve the liquidity of money markets, when its US counterparts are being much freer with the extra cash.
It was against this background that Gordon Brown carried out his tax con, cutting the basic rate of tax to 20p, while removing the 10p band. People noticed this was a disguised tax increase for many, and that it affected those on low incomes disproportionately. It led to the forced U-turn this week, as Labour backbenchers reported accurately the mood on the doorsteps, and demanded a rebate.
In the US, a positive recession-busting strategy has been followed vigorously. Interest rates have been slashed from 5.25% to just 2%, cutting everyoneâ€™s cost of borrowing. Substantial sums have been made available to money markets to ease the liquidity crunch. Mortgage regulation has been eased. Consumers have been given a boost with a tax cut, helping those on lower and middle incomes.
The UK is unable to cut interest rates as much, because of its persistent inflation problem. The UK authorities have not made so much money available, because they foolishly spent far too much on Northern Rock, instead of heading off that problem with sensible monetary easing before the run. Northern Rock, in public ownership, is now increasing the credit squeeze by having to cut back on its lending. The UK government has been putting taxes up instead of easing pressures on consumers, because of the big appetite of the government sector to spend more. Yesterday, for one year only, we were offered a modest tax reduction through the gritted teeth of a government held to ransom by its backbenchers and afraid of the voters of Crewe and Nantwich. The UK is talking of intensifying regulation, rather than easing it, while there is no danger of over-lax lending. We are told there will be more and tougher banking controls in the draft Queenâ€™s speech â€“ the usual sound of bolting the stable door after the horse has gone, making it impossible to get the horse back in.
The US should get by without the savage recession some have already called and others have forecast, because they have been so determined to see off the downturn as quickly as possible. The UK will have longer to struggle, with its twin large deficits â€“ an over-borrowed government sector, and a heavily indebted consumer one. While the tax rebate this week makes a small but welcome contribution to the consumer, it is achieved at the expense of an even worse public sector deficit. This will act as a further constraint on the government achieving a better economic performance. The Chancellor yesterday should have offered reductions in wasteful or needless spending, or, at the very least, postponed some of the expensive computer and consultancy schemes during the year when he intends to give some money back to taxpayers.
We have more months ahead of mortgage famine, falling house prices, and price rises squeezing us more. The governmentâ€™s tax increases on fuel, alcohol and others have made it more difficult to get inflation down and to reassure people that their real incomes will not fall too much. Meanwhile, the Asia Pacific region continues to outgrow us, and the pound is now falling against the dollar as well as against the strong currencies of the fast-growth countries.