OBR risks forecasting rising house prices
The most radical aspect of the new Office of Budgetary Responsibility is not that an ‘independent’ agency is now producing forecasts but that the government body is risking predicting house prices. And it confidently says house prices will keep rising.
As the value of homes is key to the UK economy - the collateral that stops banks going bust and the highly-geared asset that provides consumers with confidence - the positive picture from Sir Alan Ball’s new agency is important.
This is the one key indicator from the OBR with which the general population can relate. Telling us what economic growth will be for the next five years is interesting, but how it affects us depends on which sector of the economy we inhabit: the public sector has enjoyed a totally different growth to the building sector in recent years, for instance. Unemployment projections are equally fickle: we will either have jobs or not - with no knowledge of whether there are 1m people in the same boat or 3m. Telling us the national debt or the annual deficit simply baffles us with meaningless billions.
Even retail goods inflation is a factor beyond our control that affects different people differently. But house prices affect all homeowners and would-be owners and the difference in value changes between studio flats and mansions or even between north and south is small compared with the underlying general rise or fall.
The OBR reckons house prices will rise by 5.9 per cent this year, 1.6 per cent next year, 3.9 per cent in 2012 then 4.5 per cent in each of the two following years. Assuming the same rate for the final two years may suggest the forecasters have no view on whether the rate will be rising or falling by then, but they are certain there will be no double dip. Indeed, not only will there be no fall, there will no decline in real terms in any year – not even in 2011, because general inflation is forecast to dip to 1.6 per cent then too.
If the OBR is right, prices will be 22 per cent higher in 2014 than they are today – which would be a 33 per cent increase from spring 2009 and take values back above their 2007 pre-crunch peak.
So with negative-equity evaporating and unemployment forecast to fall from 1.5m to 1.1m, there is a base upon which to build the growth that can be taxed to repay the country’s debt and close the deficit.
Or at least there is if the OBR predictions prove correct. A lot of people who should know what they are talking about have regularly got their forecasts of house prices badly wrong. Not just estate agents who have a vested interest in talking their books, but banks such as Halifax and Nationwide that not only need to be sure their mortgages will be repaid but which are also the best collectors of data on transaction prices. These lenders have not only been regularly wrong on the degree of price change but on the direction – predicting rises when prices fall or vice versa.
So by choosing to predict house prices the OBR is not only entering new territory for a government agency, it is being very brave. Because this is the one indicator to which the public can relate, it is the one they will remember if it proves wrong.
