The only thing that can drive up house prices

If you want the price of your house to rise, you should hope for a real recovery in the banking sector. But with our big banks not much more secure than they were a few years ago, that's loking unlikely.

How desperate are you for house prices in your area to rise? Probably not as desperate as some of the property developers and residents of Poole.

In the last six months, says the Times, Poole Borough Council has recorded at least eight attacks on mature trees supposedly protected by preservation orders. Why? Because they block the view of the sea from flats set back from the coast. And a view of the sea is worth more than a view of a tree to a house seller often tens of thousands of pounds more.

Still, if Poole wants to see real long-term house price appreciation, it is going to have to hope for a lot more than a few dead trees. They'll have to hope for a recovery in the banking sector. Not a share price recovery, but a real recovery in the sector's balance-sheet health. And that doesn't look like it will happen at any great speed, if at all.

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As Graham Turner of GFC Economics points out, there are "huge funding and capital risks yet to be resolved", while the Bank of England "is clearly concerned at the risk of a double dip exposing an undercapitalised banking system while the fiscal purse remains so stretched."

The fact is that our big banks are not much more secure than they were a few years ago something that isn't going to be helped by them paying the bonus tax for their employees this year and that means they aren't going to be making much in the way of no-money-down, 100% loans any time soon.

They're also clearly not planning on making house buying as cheap as much of the population would like it to be. The Bank of England has kept interest rates on hold since April 2009 (at 0.5%) but the mortgage lenders haven't beenhaving any of it.

Instead, eight of them have increased their standard variable rates. Most now charge over 3% and many over 5% (a rate which suggests they would like their borrowers to just go away altogether).

Property markets are driven by the supply of credit and the price of credit. And right now, while things have eased since last year, that supply is tight.

Remember the peak of the bubble? Back in 2007, over £100bn worth of mortgages were issued in the UK. Last year up to November, that number was less than £10bn. The top of the market has been kept up by a large number of cash buyers and a shortage of supply, but that shouldn't last much longer.

At some point the cash buyers will have all bought, and sellers who have been holding back for fear of not getting a bubble price will capitulate, possibly in the face of the sudden realisation that the UK economy and its banks are in as much of a mess as ever. Then the odds are that prices will start falling again regardless of the views in Poole.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.