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House prices vs. growth: a friendly game

October 4, 2013

Higher house prices can definitely make people feel sunnier and business can benefit too. They also affect the economy in more complex ways.

Almost everyone has been talking about house price “bubbles” recently – from Mark Carney to our very own Mark Abrahams. There are some serious and often quite academic questions to consider. How can a “bubble” be spotted? Can a house price bubble be deflated without a painful bang? And most critical – are we experiencing one now?

It’s definitely right that the best brains in the country mull all those questions over extremely carefully. No-one would want another 2008. But some aspects of higher house prices are frequently just forgotten. The discussion almost always pitches sustainable economic growth against higher house prices – but they’re not mutually exclusive.

It’s well known that higher house prices can get people spending more in the shops. If assets are worth more, then the owners of those assets are more able to access more finance in the form of secured loans. Arguably, secured loans a better way of developing responsible lending than unsecured loans. But whatever the answer to credit cards, it’s not just the shoppers who benefit.

Businesses can borrow against property too. And when they do, those firms tend to invest for the future, not just a splurge on a Saturday afternoon.

Commercial properties are also worth more now than they were last year – or even a month ago. That’s often overlooked. But whether a small business uses commercial or residential property as security, larger values are allowing larger loans.

There’s also a major difference between long-term, unsustainable debt and short-term lending. Rather than adding to a long-term burden, short-term secured loans are designed for specific projects. That kick starts real economic growth – whether in the form of much-needed investment finance for SMEs, or vital improvements to the stock of property itself. Businesses are benefiting from house price growth – and done right that can boost economic growth.

DK