With the Governor of the Bank of England writing groveling letters to the Chancellor about the presence of deflation in the economy how does this effect the property markets?
Actually, more by coincidence than design the market at the higher end is deflating in any event and In the medium range there is zero growth, so the only activity and growth in the property market currently is below £1million. I wonder if this is anything to do with the Stamp Duty ‘give aways’ at the lower end and the draconian increases at the higher end in the recent Autumn Statement of ‘mixed blessings’.
Whilst Deflation shrinks the value of the equity in a property the debt rises commensurately and that is not good for sentiments or the ‘feel good factor’. Consumers don’t rush out to buy retail goods when they don’t feel happy and in a consumer led recovery that’s not good.
In a rising market, that is inflating, debt shrinks in relation to equity and this fuels the ‘feel good factor’.
During deflationary times government devices such as interest rates and taxation to control the money supply becomes technically useless. Base rates are as low as they can probably get and this is certainly good for mortgage interest rates that are now at historic lows.
First time buyers are going to be disappointed here since the market at the lower end is moving away from them as it rises and, despite Help-to-Buy, they will become even further disenfranchised.
I conclude that modest inflation is good for aspiration. It shrinks debt and has been a factor in the UK economy for the last forty years. Unless inflation can be kept under control by interest rates/taxation controlling the money supply rampant inflation will result and that is bad for the economy (as in the 80’s). It erodes living standards but by all accounts there is no risk of this happening despite a truck load of quantitive easing which has been has been done already.
Written by Trevor Abrahmsohn.
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