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The housing market, economics and politics are inextricably linked. For example if taxes, inflation, interest rates and unemployment are all low then it is likely that house prices will be affordable, and therefore may boom, and thus we feel good and may be inclined to vote for the present Government. However, if one or two of these factors are either increasing or high then it is likely that house prices will crash.

The dilema is that for unemployment to be low, GDP is usually high (say 3% per annum), and this means demand and inflation are also generally high. If inflation remains high then U.K. exports will become dearer and thus demand will drop thus increasing unemployment. To keep inflation low the government has told the Bank of England that interest rates should be set such that inflation, as measured by the CPI, is kept below 2%. The combination of using the CPI as, oppossed to the RPI, and the actions of the US Federal Reserve lowering interest rates during every Financial Crisis has led to historical low rates, and thus it has been easy to borrow money. In the past ten years we have seen low unemployment (with unusually low pay rises - due to cheap Chinese labour) and low interest rates however, both taxes and real inflation (as measured using RPI) have been high. The higher taxes being used to fund increased public sector spending, which in turn have enabled public sector workers to bid up house prices.

To date the U.K. consumer has ignored higher taxes as the low interest rates have made mortgages appear cheap, thus increasing house prices. These high house prices then enable the consumer to borrow money (MEW). Thus the economy has been kept going by house price inflation, increasing debt and public sector spending. This boom to bust policy has now led to increasing inflation and thus increasing interest rates and declining affordability with the result that some sub-prime mortgage borrowers are now unable to meet their repayments and are therefore having there homes Repossessed. Due to this some banks have now lost a significant amount of money. These bank losses have caused a loss in lending confidence resulting in the Credit Crunch and the bank run on the Northern Rock. We are now at the top of the cycle with the affordability of house prices low. The danger now is that the bubble will burst leading to a siginificant loss of capital and the misery of negative equity for thousands of people. The US Federal Reserve has already cut interest rates however, with both Sterling and the U.S. Dollar exchange rates in decline their is a risk of a run on Sterling thus the Bank of England cannot simply cut interest rates to please home owners. In addition, with oil prices and food prices increasing the CPI will soon start to rise leading to the need to increase interest rates and this will result in stagflation.


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It is the responsibility of Governments to manage/regulate the economy in such a way as to avoid bubbles however, Governments initially behave in the best interest of the country but in the end power corrupts and they act in their own best interests. This means they allow house price bubbles to build up as they know voters feel good when house prices increase. In the end when the bubble bursts the voters will throw the government out of office - Governments loose elections as opposed to oppossition parties winning them. Then the cycle will repeat itself. The only way to avoid the repeating cycle is via eduacation of the masses as you should never put your faith in politicians.

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