Sunday, January 9, 2011

London Property Market is burning up

(click on the graphic for a larger version)

This graphic presents a different way at looking at London property prices.  Dark red represents rapidly growing prices, dark blue represents rapidly falling prices.  The shades in between represents different degrees of price change (remember red means up, blue means down).

A couple of things to note.  First, the dark strip that starts towards the end of 2009 represents the crash.  As we know the change was abrupt.  This can be seen by the sudden shift from dark red to blue. 

Second, the market recovered in 20010.  However, the graphic tentatively points to a more recent slowdown - the right hand side edge is shifting from dark red to orange and yellow.

Finally, the data points around 2005 are very revealing.  At that time, the London property market was losing steam.  Unfortunately, the Bank of England started worry, and cut interest rates.  London prices surged afterwards.  Many of the worst excesses of the housing bubble occurred between 2005 and 2007.

Just think for a moment, what would have happened if the Bank of England had held their nerve and kept interest rates at more elevated levels.  Property prices would have cooled, the impact of the financial crisis would have been muted and the UK economy would have been in better shape to handle the crisis.

That rate cute also killed the Bank of England's inflation credibility.  For 40 of the last 48 months inflation has been above the 2 percent target. 

Ultimately, the rate cut in 2005 was the worst monetary decision in two decades.  We are paying for it now.

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