Are central banks right to ignore worldwide property price rises?

It would not take much investigating to find a recent headline suggesting that property prices in various areas of the world are now approaching their record highs. This is becoming something of a daily phenomenon now even though the worldwide economy is still struggling and many governments around the world have enormous debt issues to address. Central banks across the world have been commenting upon the rise in property prices and recently the Bank of England and the Reserve Bank of Australia seemed to discount this growth in property prices.

It is debatable as to whether this dismissal by various central banks is as flippant as it seems because the property market does play a major role in the worldwide economy and, let’s face it, the vast majority of the worldwide populations personal wealth is tied up in the sector.

Different economic times

Traditionally a buoyant economy would eventually lead to a buoyant local property market although at the moment we are in very different economic times. Many countries around the world have maintained rock bottom interest rates for a number of years and even just this week the Bank of England suggested that there will be no increase in UK base rates until after the next election.

In many ways the property market has benefited from its historic tag as “a safe haven” in troubled times although the ongoing increase in property prices is in many ways fuelled by a lack of stock for sale. In years gone by central banks would have increased base rates to make finance more expensive thereby taking the edge off demand. However, at this moment in time many governments around the world are looking to relight local property markets by offering significant financial assistance to an array of buyers – in the hope that this will drag local economies into positive growth territory.

Quote from PropertyForum.com : “The UK economic performance over the last five years or so has been challenging to say the least with a near double-dip recession, massive austerity measures and national debt continuing to rise by over £100 billion a year.”

Could governments be fuelling the fire?

There is no doubt that property markets around the world are central components of the worldwide economy and therefore when property markets recover this will have a beneficial impact upon local economies. The fact that so much taxpayer’s money is being pumped into the property market, both directly and indirectly, by governments around the world is in many ways fuelling the fire of demand. Governments could switch off this tap in an instant and there are accusations of political interference as we approach new elections for example in the UK.

While traditionally economies have bloomed before the local property market has followed, this time it seems to be the property market which is pulling worldwide economies back into positive territory. Recently we saw the Reserve Bank of Australia reduce Australian base rates yet further as a means of supporting the economy although this will pour more fuel on the fire which is the Australian property boom.

Can central banks really ignore the property market?

While in public a number of central banks around the world have dismissed the recent rise in property prices as a short to medium term phenomenon, you can bet your bottom dollar all central bankers will have their eyes very closely on property price movements. Quite what they can do in the short to medium term, bearing in mind the worldwide economic situation and record low interest rates, is debatable but this open dismissal of recent property price rises is something of a red herring.

Inadvertently, as property prices continue to push ahead this may bring more stock onto the market which could see market consolidation in the short to medium term rather than more growth. The fact is that the current economic environment, in the aftermath of the 2008 mortgage crisis, is a once-in-a-lifetime event and while economists and central bankers give the impression they have got everything under control, nobody quite knows what will happen and what needs to be done – well not yet.

At this moment in time injecting confidence into investment markets, into local and worldwide economies and giving financial support where required is perhaps the best we can hope for from worldwide central banks.