Merryn's Blog

How the great property market bail-out is making you poorer

The government's attempts to avoid a house price crash will lead to higher inflation and lower wages for just about everyone.

I've been participating in a Channel 4 live blog about savers and the miserable rates of interest they are getting on their cash.

The Bank of England's deputy governor, Charlie Bean, says that savers who don't think they are getting enough interest on their cash should keep their consumption up by spending their capital instead. Savers, obviously, find that a pretty unpalatable solution to their problems. They wonder if a better solution might be for the Bank of England to note that inflation is far, far higher than 2%, and to put rates up.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Sadly, that isn't going to happen. What we are seeing in the UK economy at the moment is a sustained effort to engineer nominal property price stability. Why? Because sustained property price falls and their knock-on effects through consumption to the rest of the country are currently considered to be just too damaging to our still-fragile financial system. But while everyone is worrying about deflation, it is entirely possible that this price stability (or the effort to create it at least there is no guarantee that it will work) will come at the cost of inflation in pretty much everything else.

The idea, for what it is worth, is that at this point in the cycle, price inflation won't lead to wage inflation. That's because, with unemployment so high, only the very unionised think they stand a chance of wage rises any time soon. The net effect, then, is real wage deflation for most British workers, something that obviously makes them poorer. We are supposed to accept this without complaint on the basis that being paid less in real terms makes us more competitive on the world stage and hence more prosperous in the long term.

Advertisement - Article continues below

That might or might not be the case (it is worth noting that similar arguments have been used to defend sterling depreciation and worker impoverishment for decades). But I wonder, if everyone understood the price they were paying for the government's attempts to avoid a house price crash,whether they'd be altogether happy.




How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019

Beyond the Brexit talk, the British economy isn’t doing too badly

The political Brexit pantomime aside, Britain is in pretty good shape. With near-record employment, strong wage growth and modest inflation, there is …
17 Oct 2019

Most Popular

Stock markets

Here’s what really matters for markets in 2020

The current geopolitical turmoil is making headlines. But it isn’t particularly significant for investors, says John Stepek. What matters more is how …
10 Jan 2020

Mindfulness and wellbeing: the relentless, creepy rise of the enforced happiness industry

The evidence suggests we’ve never been richer or healthier, yet we are always being told how stressed and discontented we are. Jonathan Compton assess…
9 Jan 2020

A look at the state of Iran’s feeble economy

The Islamic Republic is a big player in regional geopolitics, but its economy is weak, its people in revolt and its enemies growing bolder. Simon Wils…
11 Jan 2020

UK property prices are in the doldrums

House prices barely rose in 2019. Good news, says Nicole Garcia Merida.
9 Jan 2020