Monday, 21 April 2008

The crazy housing market

Demands are being made for the Government and the Bank of England to do even more to bail out the stuttering housing market. But, as Martin Wolf has pointed out in the Financial Times 'anybody who thinks it is a duty of the state to keep housing expensive is crazy.'

He continues, 'It is high time the British realised that people cannot become rich by selling ever more expensive houses to one another. According to the IMF's latest World Economic Outlook, UK house prices are more overvalued, relative to economic fundamentals, than those of any other high income country.'

Given that many people find it difficult save, a house is seen as an investment as much as a place to live with the notion that one can 'downsize' or move to a less expensive area when one retires. Given that UK house prices have risen 150 per cent in real terms since 1996, one can see why they think 'bricks and mortar' is a good investment.

But such rises are not sustainable because eventually they mean that first time buyers cannot enter the market and without them the whole pack of cards starts to collapse. Indeed it would take a 25 per cent fall in real house prices to put them on the 1971-2007 trend line.

Given that even a slight fall in prices sends the Daily Mail into paroxysms, such a fall would be regarded as a political catastrophe. But is it really sensible to run an economy based on debt secured by housing? However, a belief in housing as an investment is so structurally and culturally embedded, it would be difficult to shift in the short run.

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