The City hedge fund manager claims that average house prices could plummet by 20% following a Tory victory, if the party presses ahead with its plans to cut public sector jobs and waste in the first year of Government. RAB argues that such a move would boost unemployment, undermine confidence and wreck the fragile housing market recovery.
Economist Dhaval Joshi said the aggressive cost-cutting, designed by shadow chancellor George Osborne to fund a cut in national insurance contributions next year, would lift unemployment by almost 250,000 people.
Joshi added: “[House] prices remain around seven times average income, which is higher than the long-run average of 5.5. It is unsustainable without continued low interest rates and government support, especially public sector jobs.”
A Conservative spokesperson disagreed, accusing the fund manager of exaggerating the potential impact of the planned spending cuts on jobs.
She said the plan was to leave public sector posts unfilled when they became vacant, rather than cull jobs, and pointed to a survey of City investment professionals that warned a Labour win would dent Britain’s credit rating and spark a run on the pound.
Half of the people surveyed said a Labour victory or hung parliament would push up interest rates.
Joshi claimed that without sustained government support, residential property would go down the same route as commercial property, where values have fallen 22% since 2006.
He added: “Recent support to house prices will disappear if base rate or unemployment heads higher. Both risks are real, but higher unemployment is the more likely.
“On our calculations, Labour’s 1.5% spending cut for 2010-11 equates to 120,000 jobs, while the Conservatives’ 2.8% cut would shed about 230,000.”
