Low interest rates will support house prices until 2014, argues Harvey Jones. And he's not happy about it.
Just one thing has stood between the UK and a housing crash this year: rock-bottom interest rates.
By scything base rates to a 316-year low, the Bank of England has spared us a house price collapse, saved tens of thousands of homeowners from repossession, and kept the high street alive, by pushing more cash into homeowners' pockets.
If you think the recession has been rotten, just imagine what it would have been like if rates were 6% or 7%, as they were in the 1991-92 recession. It doesn't bear thinking about.
Low base rates are the reason every pundit who predicted a property collapse has been wrong. And as long as rates stay low, prices won't fall, and Cliff D'Arcy will have to carry on renting.
Three cheers for cheap money!
So what have low base rates ever done for us?
Well, they have given the average homeowner an extra 10% disposable income at a crucial time.
They have given breathing space to tens of thousands of heavily-indebted homeowners, slashing their monthly mortgage repayments and allowing them to cling onto their properties.
And they have saved the UK economy from a gruesome fate by sustaining confidence, spending and employment.
And three boos
But savers won't be celebrating. They are the unmourned casualties of the battle against economic meltdown. To the policymakers, they were expendable.
First-time buyers won't be too happy either. Low base rates have stopped prices from falling to more sensible levels.
Anybody (me included) who hoped the recession would reduce UK house prices to rational levels will also be unhappy. Instead they have been artificially propped up, to prevent the economy from falling into a death spiral.
And prices will stay artificially high for as long as interest rates are kept artificially low.
Expensive yet affordable. Say what?
In historical terms, house prices are still expensive relative to salaries. With the UK in its worst recorded recession, it made sense to expect prices to crash rather than rebound this year.
But low interest rates have made property relatively affordable, and as lenders gradually reduce their rates and soften their criteria, it might become yet more affordable.
Anybody who wants to buy a property but can't find a mortgage must be in despair right now, watching prices creep further out of reach.
Yes, cheap money is creating another property price bubble, our flailing economy apparently can't stay afloat without one. It's not pretty, it's not rational, but it's what's happening.
Unemployment isn't rising as fast as many expected either. That also convinces me that prices aren't dropping soon.
And nor are interest rates
The Bank of England's November Inflation Report says that any recovery will be fragile, and although inflation may pick up slightly next year, it could retreat again in 2011. The Bank will keep interest rates low until it is confident the economy and banking sector are fully mended, which could take years.
The result is that property prices will continue to crawl upwards. Nationally, they were up 3.1% in the three months to September, according to figures from the Department for Communities and Local Government.
House prices for first time buyers are rising fastest of all, up 2.7% in September to £147,517.
That figure depresses me. With youth unemployment at 20%, graduates burdened with massive debt, lenders demanding hefty deposits and property prices rising, home ownership will remain a distant dream for many.
The young are inheriting the worst of all worlds. I don't think that will make for an equitable or happy society.
What do you think? Ask other lovemoney.com members for their views using our Q&A tool.
So what do I do?
If you're thinking of buying, I can't see much point in delaying. Until interest rates rise, property isn't going to get cheaper (unless there is a second global economic seizure).
If you've seen the right property at a price you can afford, and can secure a cut-price mortgage, then go for it. You are taking a gamble if you buy, naturally, because prices could sink, but you are also taking a gamble if you don't buy, because they could float out of reach. And I think the second scenario is far more likely.
Don't overstretch yourself, and set money aside every month, to pay down your debt before inflation eventually returns and base rates increase. Adopt this goal - Cut the cost of your mortgage and pay it down early - to find out the best way to do this.
This may be a sucker's rally, but I believe it will continue for as long as money remains cheap - and that could be until 2014.
If you're going to get sucked into this rally, it may be better to succumb at the beginning than the end.
As I said, it's not pretty.
Plenty of people still believe a property crash is coming - feel free to rip my analysis apart in the comments section below. But don't ignore the colossal and distorting impact of low base rates.
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