Duncan’s Economic Blog

House Prices

Posted in Uncategorized by duncanseconomicblog on October 30, 2009

Rob Williams has an excellent article on the Compass website today:

The great property bubble has been, and continues to be, a disaster. Wealth hasn’t been created, it’s simply been redistributed, and to those who are already well off. It’s siphoned away money that could have been invested in more productive parts of the economy.

For short term electoral reasons, the government would like house prices to rise. For the sakes of the millions priced out of a decent home and for the sake of a balanced economy based on sustainable investment, we must hope they don’t.

I fully agree:

Thatcher revolutionised the housing market through the ‘right to buy scheme’. Britain is now close to being the ‘property owning democracy’ of which she spoke. Given that 70% of voters are now owner occupiers it is no surprise that governments, of all colours, will aim to give these people what they want. But this is not what centre-left politics should be about. We need to create a new housing market, where prices rise in line with earnings, where people think of their home as a place to live not a source of cash and where tenants (whether private, social or council) are not seen as lesser beings than owners. This will mean building a lot more homes, replenishing the social and council stock and probably being more prescriptive with banks as regards their lending policies. It is hard for any government to say to 70% of its electors, we don’t want the value of your assets to rise so quickly, but, for a centre-left government, it is necessary.

9 Responses

Subscribe to comments with RSS.

  1. dannyboy said, on October 30, 2009 at 1:32 pm

    I would imagine that continued low or zirp interest rates will support housing at a larger multiple of nominal earnings than we have been used to in the past.

    In an economy looking forward to very low growth and rates, housing simultaneously becomes more expensive and more affordable.

    Isn’t it the case in japan that housing there remains expensive in relation to income?

    Perhaps the relentless rise in average house prices the last 30 years is part and parcel of the same trend as a relentless decrease in interest rates since the mid 1970s?

  2. gastro george said, on October 30, 2009 at 3:28 pm

    “I would imagine that continued low or zirp interest rates will support housing at a larger multiple of nominal earnings than we have been used to in the past.”

    Isn’t that exactly what the bankers thought as the last bubble expanded?

    • duncanseconomicblog said, on October 30, 2009 at 3:45 pm

      It was indeed…

    • dannyboy said, on October 30, 2009 at 9:54 pm

      “Isn’t that exactly what the bankers thought as the last bubble expanded?”

      A common misconception, IMO. Would there have been a housing bubble post 2001 (given the deflationary pressure lurking even back then) if :

      * there had been no freddie + fannie
      * there had been no securitisation ponzi
      * banks had not thrown away basic common sense of underwriting and allowed 125% loans, self-cert, option-ARM, interest only, crazy buy to let, etc etc etc etc
      * there had been no JPY carry trade
      * the chinese had not recycled the earnings of their export sector back into western economies

      I’m sure I (and you) could dig up other factors . Low rates mean low demand for money. Now all the above have gone by the wayside, we shall see the real effect of low rates on housing and other asset classes.

      Also, you didn’t address my point about housing in japan still being expensive in income multilpe terms.

  3. Mark Still said, on October 31, 2009 at 12:31 pm

    Housepricecontrol.org.uk

    This is a recipe for economic and social disaster!

    Earnings going down!
    Unemployment going up!

    Over inflated house prices going up again!

    The cause of the credit crunch was astronomical housing inflation!

    Its like the Alcoholic who drinks to lift himself out of depression that is actually caused by the Alcohol.

    Another fine mess the government is getting us into for short term economic growth!

    Housepricecontrol.org.uk

  4. Cantab83 said, on October 31, 2009 at 2:36 pm

    Duncan, I agree with your desire to see house prices controlled and rise in line with earnings. I have just posted a proposal suggesting that a future government (unfortunately I can’t see this one having the courage or vision to do it) setting a target for house price inflation that is in the range between the CPI target and the rise in average earnings.

    I do feel inclined to disagree with you slightly on the first part of this remark though:
    It is hard for any government to say to 70% of its electors, we don’t want the value of your assets to rise so quickly, but, for a centre-left government, it is necessary.

    I understand that this is the current political orthodoxy, and perhaps explains the reluctance of most politicians to act in this area, but I think it depends on how you spin the control of house prices. If you sell it to the electorate as preventing future housing crashes, providing a stable growth in asset values similar in value to bonds, and preventing future recessions, then I think most will welcome it. Unfortunately we will probably never know unless we get a government, PM or Chancellor that is brave enough to try. I do agree with you that it is very necessary that we do it though.

  5. Mark Still said, on November 1, 2009 at 8:51 pm

    In the long run if housing keeps on rising the way it doe’s, then the only ones able to buy will be the super Rich. The 70% figure of home ownership will actually go down eventually, as people will be forced to rent from private landlords.

    For the last 30 years governments have made a real mess out of short term growth policies, giving us a long term social and economic problem. If house prices were not so expensive more of it could be built with solar panels and local water capture facilities.

    This stupid system of astronomical housing inflation has suppressed our progression!

  6. gastro george said, on November 2, 2009 at 11:47 am

    “If you sell it to the electorate as preventing future housing crashes, providing a stable growth in asset values similar in value to bonds, and preventing future recessions, then I think most will welcome it.”

    It’s the Daily Mail fear-factor as much as anything. Many people have, like drug addicts, bought into the idea of rising house prices as free money. This has been perpetuated by the property programs on TV, and is embodied in the concept of the “property ladder”.

    “If house prices were not so expensive more of it could be built with solar panels and local water capture facilities.”

    The value-for-money of modern housing is staggeringly poor. As people would buy almost anything to get on the “property ladder”, we end up with tiny inefficient suburban hutches.

    One thing I find surprising is how the government is beholden to the idea that there is a massive pent-up demand for new housing, which they must assuage. What there is is a massive pent-up demand for new housing – at a cheap price – just as there is for Bentleys. Any demand excess is largely down to the lack of any alternatives – with the demise of public rented sector and the social stigma now associated with council housing.

  7. dannyboy said, on November 2, 2009 at 3:54 pm

    Looking at house prices purely in terms of the sale price doesn’t make much sense when what matters is affordability. Higher prices are fine if one only pays twice the total value of the house in principal and interest due to low rates rather than 3, or 4 times the amount over the lifetime of a mortage.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: