One of the first things that Liz Truss did when she took up her role as prime minister this week was announce a freeze on spiralling energy bills. This followed the appointment of a housing secretary, Simon Clarke — he is the fourth MP to take up the post in just under a year.
Clarke may be comforted by the plan, with economists predicting that a reduction in energy costs will soften the coming recession. However it could be cold comfort, with some warning that the move could, counterintuitively, lead to house prices falling even more.
When news of Truss’s plan to freeze average household energy bills at about £2,500 a year leaked, forecasters started polishing their crystal balls. The good news is that inflation could peak at 11-12 per cent in October, rather than a higher spike next year. This could lead to stronger household incomes and a weaker recession.
Karl Thompson, an economist at the Centre for Economic and Business Research, says: “By supporting real incomes and saving levels, an energy freeze would help to soften the anticipated blow to housing market activity and prices.”
However, Thompson sounds a warning: “While a [energy price] cap would improve the inflationary outlook, broader price pressures mean that the Bank of England would probably continue to hike rates, meaning that mortgages are set to become yet more expensive. As such, despite the cap, 2023 is still likely to be the year of falling house prices,” he adds.