Looking Back to the Crash

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Today we found out that Barclays and four of its former managers – including ex-Chief Executive John Varley – will stand trial for fraud, allegedly committed at the height of the of the 2008 financial crisis. These are the first criminal charges brought in Britain pertaining to the crash, and they remind us of its continuing impact. Its legacy is still felt, in politics and in the property market.

It was in response to the crisis that the Bank of England, in 2009, cut interest rates to 0.5%. Since then, HouseSimple reported this week, average UK property prices have grown by more than 40% – £60 000. Low interest rates stimulate house prices by making borrowing more affordable and increasing consumer confidence and inflation expectations. We’ve written before about the Bank’s dilemma with regards to raising rates to pre-crash levels: Brexit has such potential to hit demand that rate rises might kill off growth, but a falling pound would be protected by higher rates. The Bank’s decision to halve rates again following the referendum result, and recently to hold them at 0.25% indicate that we can expect the Monetary Policy Committee to err on the side of low rates in the short to medium term.

However, the longer term impact of the crash, low rates and high house prices is mixed. For many people, rising property assets caused windfall gains, with a recent report estimating £2.3 trillion of wealth accruing to property owners since the 1990s. But after the crash, low interest rates kept property prices rising, whilst those without assets – especially the young – bore the brunt of the recession and subsequent austerity. In addition banks such as Barclays, burnt by the crash, became more reluctant to lend. The result is that home ownership now seems out of reach to many people (although it might not be as far away as you think – if you need property finance, take a look at what Tiger has to offer). This problem was partly reflected in the recent General Election, with renters and the young far more likely to back Jeremy Corbyn’s Labour Party.

The question then is this: can the era of high property prices last, given the younger generations’ lack of means and the impact of Brexit? Recently, mortgage lenders have reported prices falling, but official numbers from the ONS recorded a six-month high in house price inflation in April. The picture, in short, is unclear, and a lot hangs on electoral politics and Brexit. However, some fundamental truths remain: low interest rates mean that this is the time to borrow to invest; a growing population will always need housing; it’s better to be an owner than a renter in the current environment.