How house prices are affected by politics

Interest rates are a key driver of house prices, and politics were once a key driver of interest rates. But with Gordon Brown's move in 1997 to hand over interest rate decisions to the Monetary Policy Committee (MPC), much of the political heat has gone out of mortgages.

The MPC meets regularly to set the Bank of England base rate, from which mortgage lenders such as banks and building societies set their savings and mortgage rates. In order to build in a profit margin, banks and building societies tend to pay below the base rate on savings and charge borrowers above the base rate.

Barry Naisbitt, chief economist with Abbey National, says that because the MPC's decisions are now less inclined to political bias, they are able to look at what is good for the overall economy. Previous chancellors of the exchequer who were able to set rates themselves sometimes used interest rates as a quick fix for political problems.

Mr Naisbitt said: "Interest rates have now been taken out of the political arena. Although the MPC members are on record as having said they are worried about house price inflation, they also have to consider the effect interest rate rises would have on the manufacturing sector."

One way politics could still have a significant effect on house prices would be if the chancellor were to change the rules on stamp duty, says Adam Law, UK economist with Barclays Capital.

"Gordon Brown could increase the level of stamp duty in order to raise money for public spending as well as having the additional effect of calming down the housing market," he said.

He believes that political decisions will have some effect on property prices next April when increases in national insurance, announced in the last Budget, take effect. "People will have less disposable income and this will have an impact on how wealthy they feel."

Two of the factors in the boom and bust house price inflation of the 1980s were political. The first was the decision to scrap double mortgage relief for couples, which had been announced in the April Budget of 1988, but didn't become binding until August. In the interim, couples raced to buy homes in order to qualify for the generous tax relief. This helped to push house prices higher. Many of those couples were then left with negative equity when the housing market collapsed.

Interest rates also had a damaging effect on the affordability of property. A series of decisions to raise base rates had a knock-on effect on house prices, so that at one point home owners on standard variable rates were paying 15%.