BBC today certainly make for puzzling reading. The gist of the story is that the UK house market is bumping along the bottom, with some signs of increases in house prices this year.
For a variety of reasons, the price of houses, Daily Mail obsession though it is is the absolute centre of the UK economic problems today:
a) The majority of personal savings art in the form of House Price equity
b) Mortgage interest payments and rent (other people' mortgages) are the largest single bills paid by everyone in the UK
c) A fast rising population is putting demands on housing at a time when new builds are at post-war lows. Fewer and fewer first time buyers can access the market.
d) Banks are saddled with hundreds of billions of mortgage debt, a small change in this profile for the negative and they are bust. Lloyds Bank for example has said publicly in its analyst presentations that it is highly geared to the UK mortgage market and would be in huge trouble if rates went up to fast as that would push people beyond their ability to rep-pay
e) The huge bank exposure to residential mortgages means that they are having to borrow money at higher rates and therefore lend at higher rates on other personal (credit cards) and business lending, also capital allocation means there is less money available for other types of lending.
All the above reasons are key to understanding why the Bank of England considers it its number one priority to support the Banks and property debt holders by keeping interest rates down at historic lows. By doing this repayments are less and so people have more disposable income and also the banks have less defaulting property and so have more money to lend elsewhere and don't go bust. The logic is good.
Except that it is a long-term disaster. By having low interest rates the price of houses remains high; but also there are a lack of buyers as prices are unaffordable. This is why the market today has only a 1/3rd of the transactions as pre-2008. Considering the depth of the recession, prices are barely below their long-term average increase (see graph from Nationwide statistics above). After the last House price crash it was more than a decade before recovery, this time it should be at least the same, so stories that they are recovering so soon are problematic.
Until points a) to e) are addressed, the UK monetary and fiscal policy will remain in thrall to the Property sector. There are some simple solutions, the first is to try, as the Government is through planning relaxation and tax breaks, to hugely increase the supply of houses - as ever, this extra supply will meet or exceed demand and reduce prices (you could try and shrink the population by controlling immigration too, but let's not go there today...). Higher interest rates would improve bank returns and also returns for savers in our economy, which would be a better way to go rather than rewarding debtors with low rates. However, rates are too constrained by the need to avoid a housing bust.
The key indicator for us to follow though is the price of houses as monetary policy will follow them exactly. if the market starts to recover price wise then rates will creep up, if not then rates will remain super low. At least the terrible situation outlined above can help us decide on our own debt needs for the next few years.