Some bloggers complain that I want to encourage more debt, to reinflate the bubble. They add that I do not take seriously the need for lower house prices, and want to carry on with the old model of inflationary booms based on rising house prices.
These are serious points, but based on a misunderstanding of the remedy I am proposing. We need to rebalance the economy, not drive it downwards.
Take the issue of debt. The public sector, some individuals and some companies need to borrow less. The process of cutting personal and company indebtedness is well underway. That’s why, for example, RBS has shed £700 billion from its balance sheet already and is planning to shed another £300 billion because it had borrowed too much. Individuals and companies who have still got too much borrowing would be wise to carry on with the necessary adjustment, and are likely to do so.
The public sector has only just begun to cut the rate of increase in its debt, and needs to do much more. That is what most contributors to this site have been agreeing and debating for the last three years.
To create a more successful economy we need more raqpid growth in a range of areas like exports, manufacturing and some private services. This is where we need banks that have the capacity to lend more. To grow an economy or to rebalance an economy you need a ready supply of credit for good investments, to pay for the productive and potentially profitable activities we need to strengthen. All those people and companies who have not overdone the borrowing need access to credit.
The UK needs new power stations, better roads, more exporting manufacturers. It needs to make more of the things we currently import from China. That is where we need more lending. The collapse of business lending by £60 billion in the last 17 months has overdone the repayment of the corporate collective overdraft. The business sector is now on average well financed and generating cash. It could do with a bit more borrowing.
House prices have fallen by around one fifth from their peak levels, but are still high compared to people’s incomes. Some of the quantitative easing seems to have found its way into some recovery of house prices from the low. In recent weeks agents report a surge of property coming back onto the market after a period of little supply. This is probably related to the abolition of Home Information Packs, which deterred people from testing the market with their homes. It is also likely that the CGT changes encouraged some buy to let owners to sell before the new higher rate came in.
Part of the rebalancing would in an ideal world allocate less money to housing and bring house prices back into a better relationship with earnings. This may now happen, with more real estate professionals expecting a period of house prices moving sideways whilst earnings resume some upwards progress. Stricter controls over immigration will take some of the demand pressure out. Tougher bank rules over deposits and the income needed to service a mortgage will also take some of the heat out. Sensible people will work out their family finances with the expectation that interest rates will not stay this low for ever.
Those who want a more abrupt adjustment of house prices to “get it over with” are also wishing for more instability in the banking system which could damage other activities. If the authorities allow too sharp a decline they may lose control, as they discovered in the autumn of 2008.