The weekend debate: House prices, up or down?

Here’s your starter for ten in our weekend slot where we throw up an idea or thought for debate…

Either actual or projected falls in house prices are almost always described as bad news in both the media and political circles. Yet it is also common to hear people complain about the lack of affordable housing, difficulties getting together a sufficient deposit or problems with the cost of mortgages – and those complaints have been common in both times of boom and bust.

So if predictions for a fall in house prices this year turn out to be right, will that be good or bad news?

Post your comments below…

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44 Comments

  • Good news.

    1) If we used a house for it’s primary purpose, as a place to live, then the more affordable it is the better for society.

    2) It is becoming increasingly clear we need to move away from a debt based way of living (and has been for many years before the current economic crisis). Higher house prices mean, for the majority of people, higher mortgage debt.

    3) When the housing market is that much more accessible to the wealthier and better off of the younger generations we are only encouraging the housing investment culture.

    4) As part of becoming a more sustainable nation we need a radical shift in the way we view how we live. Single people and couples in large houses is simply environmentally unsound. Whilst money is a key factor, housing is considered a display of wealth and many people are denied the chance to own a house, whether you need a large/small/any house will never become a serious consideration.

    Sire it’s bad news for those who use houses as investments, but personally I have very little sympathy for people who use housing properties as investments and think of house prices in a purely selfish way.

  • I think the sense the media uses the notion of “good news” for rising house prices, is that over the years and certainly for particular generations / people who have bought and / or moved at particular times, extra usable cash has been generated. Now as we all know there are significant losers and downsides to that process. Trouble is, getting attitudes changed (and people’s financing practicalities) changed quickly is a problem. So the transitionto the more virtuous situation you describe, Alex, is not going to be easy!

  • It depends whether you’re an Orange Book Lib Dem or a proper Lib Dem, doesn’t it?

    If you’re of the Clegg variety – you’ll say “better if they drop” because it lends credence to your economic rebirth + allows to justify the appalling risks you’re taking with the economy. It allows the traditional signs people look for in a growing economy, like rising house prices, to erode in the ever-descending spiral the economy is in.

    If you’re a proper Lib Dem you’d say “better if they rise” because it creates confidence in the economy, meaning people will spend, meaning growth will happen, meaning tax receipts go up, meaning we can spend our way out of the economic problems we’re in.

  • Stuart Mitchell 26th Feb '11 - 10:36am

    Well said; this has long been one of my pet hates. I’ve complained to the BBC in the past about this but didn’t even get an acknowledgement. I want my kids to have a realistic prospect of buying a decent house when they grow up so I’d be happy to see prices fall much lower and then stabilise, even though on paper I’d be worse off.

    Rising prices only benefit the small number of people who own properties as investments or are looking to downsize; for everybody else they are a disaster. One of the greatest failings of the last Labour government was that they let prices spiral to ludicrous levels, which has had an absolutely devastating effect on any notion of “social mobility”.

  • Simon McGrath 26th Feb '11 - 10:54am

    @Stuart ‘One of the greatest failings of the last Labour government was that they let prices spiral to ludicrous levels,’

    and what were they were supposed to do to stop this?

  • Lorna Spenceley 26th Feb '11 - 11:03am

    As a parent of children in their twenties, I’d be hoping for house prices to become more affordable so that they and their friends can begin to aspire to a home of their own. However, if house prices fell, there’s no guarantee that property would go to first time buyers rather than to ‘buy to let’ landlords, so that wouldn’t necessarily help. Housing in this country is in such a parlous state it needs more than fluctuations up or down in house prices to solve it.

  • Stuart Mitchell 26th Feb '11 - 11:20am

    @Simon “and what were they were supposed to do to stop this?”

    Regulating mortgage lending would have helped. For decades we had a situation in which most people understood that they would only be able to obtain a mortage of up to three times their income (or 2.5 times joint income). This was still very much the case back in 1997 when my wife and I were able to buy our first house (a reasonably decent one) for less than twice our joint income, which itself was modest. These sensible multiples helped maintain a sustainable housing market for many years, and the government should not have just sat back and watched as the banks recklessly messed the whole thing up.

  • Nonconformistradical 26th Feb '11 - 11:25am

    @Simon McGrath
    ‘@Stuart ‘One of the greatest failings of the last Labour government was that they let prices spiral to ludicrous levels,’

    and what were they were supposed to do to stop this?’

    Restrict bank/building society lending so that people did not take on debt that in no way could they afford…

    Do what one would expect a labour government to do and get more affordable housing built.

  • High property prices lead to higher prices of everything.

    If you want to run a cafe and your rent is £5k a year you can sell cakes for £1 each and make a good living.
    If you are paying £20k a year the cakes need to be £3 each.

    All that is happening in the £3 cake scenario is that the interest on a loan (of money that never existed) is going to a bank in profits rather than into the real economy.

    The sooner asset prices crash, and the losers are made to take their losses (banks, bank shareholders and property speculators) the sooner we can get on with living decent lives.

  • Rising house prices make people richer by forcing market entrants to pay more and more. In the rest of the world this is called a Ponzi scheme. In housing it is seen as good economic sense.

    Falling house prices are a GOOD thing

  • As others have said, house prices need to reach a level that has some relation to normal people’s salaries. This wil probably be less painfully achieved by stabilisation and slow falls in prices.
    For those in London/South East, don’t forget that in some parts of the country house prices fell and didn’t go up much, so are more affordable despite lower salaries. My brother lives in Yorkshire in a town that is commutable distance to both Manchester and Leeds and his friends (as couples) have almost all been able to buy modest houses and these are not for the most part university educated professionals.

    However, I am able to take this position because I bought my (London) flat primarily to have a nice place to live in (I do!), not as an investment and the fact that I had a decent deposit which insulates me from negative equity, but ironically the deposit was funded from property. However I have to confess that the deposit was generated from selling previously owned property.

  • Timak
    “High property prices lead to higher prices of everything.

    If you want to run a cafe and your rent is £5k a year you can sell cakes for £1 each and make a good living.
    If you are paying £20k a year the cakes need to be £3 each.”

    But they don’t. Rising house prices do not lead to rising rents. In fact that’s how it’s possible to tell whether house prices are in a bubble – by looking at the ratio of the gross annual rent to the house price. In 2000, in my street, the ratio was over 10%. House prices rose by around 180%-190% during the years of the bubble (from 2000-2007) whilst the rents in the street are almost exactly the same in nominal terms today as they were in 2000, meaning the ratio is now around 6-7%, despite a fall in prices of around 20%. That means that prices across here, and across the Country, are still very much in a bubble and will fall further for years to come. Asset bubbles are often symmetrical – the late eighties bubble took around six years to inflate and six years to fall (from 1989-1995). This bubble took 12 years to inflate (1995-2007) and it will probably take a similar time scale until we reach the bottom.

    @Simon McGrath
    “and what were they were supposed to do to stop this?”

    Regulate lending is the more than obvious answer – given that the price rises during the bubble were entirely due to the lending pratices of the banks. Alternatively, a libertarian, Austrian economist would say that the banks should have been allowed to fail and interest rates should have been kept where they were, in which case prices would have fallen further, faster. They’ll still fall anyway, but at a slower rate (you can’t buck the market). Labour did eveything possible to prevent prices from falling (to bribe dumb voters) in their last couple of year in office – e.g. lowering CGT, support for support for reckless mortgage-debtors, etc.

  • @ Simon McGrath

    What were they supposed to do?

    As people have said, regulation of mortgages is a good point, but more important in my mind would have been to provide substantial disincentives to the owning of multiple homes for the purposes of using them as investments, probably through higher taxation of profits gained from the sale and rental of these properties and removal of any benefits for owners of houses which stand empty to help bring the large amount of empty but owned properties in to the market.

  • Simon McGrath 26th Feb '11 - 1:54pm

    @Stuart, Nonconformistradical and Steve
    you all want controls on how much the banks could lend. which is odd becuase the vast majority are actually not having trouble fifnancing these mortgages, repossessions are still very low.

    House prices have gone up for a number of reasons:
    – restriction on the supply of new land for housing
    – increased demand for housing due to net immgration of around 3m people
    – low interest rates

  • Alisdair McGregor 26th Feb '11 - 3:26pm

    It would be better if they stabilised & stayed flat (or at least in line with inflation).

    A return to rising house prices will result in a rerun of buy to let, with property value speculation and rental as the motivation, while falling house prices will have the negative equity & repossession problem (including voluntary repossession, which many people are using as a way out of their trap at the minute).

    Ultimately though, house prices have a major pressure to rise based on the rising UK population and the fact that housing degrades over time, further limiting supply.

  • It’s good news – at least if we are not talking about precipitous falls in house prices. We don’t want a crash that putstoo many people into negative equity. I’d like to see a modest fall and then a generation’s worth of flatlining.

    I think, however, that one crucial thingw e need to change in this countruy is this absurd obsession with property ownership. We need to sort out the legal framework of the private rental market (I am not talking over-regulation, but tenants need to get a chance to get more security, and a chance to take more responsibility for the place where they are living oif they intend to stay there for years). We need to get rid of the absurd idea that’s still too often expressed that it is impossible to start a family if you don’t own a house. It works perfectly well on the continent, where plenty of middle class people don’t own a property, or only buy fairly late in their lives. If people don’t feel under so much pressure to own a house, they wouldn’t be so willing to pay ridiculously high prices for propertiues which are often not even of a good standard, and I’d think that the whole thing would calm down a bit.

  • @Simon McGrath
    “House prices have gone up for a number of reasons:
    – restriction on the supply of new land for housing
    – increased demand for housing due to net immgration of around 3m people
    – low interest rates”

    Absolute nonsense. That’s the kind of dross that estate agents come up with to try and scare people into buying houses at inflated prices. Have you hear about the credit crunch and the financial collapse? It was based on unsustainable lending that fed into land value inflation, creating massive bubbles in residential and commercial property. If there was a shortage of supply then rents would have gone up. Rents didn’t go up; house prices did, on the back of easy credit. They will continue to fall for several years.

  • Old Codger Chris 26th Feb '11 - 5:46pm

    Maria is absolutely right about private lettings.

    She is also right about properties which are often poorly built. Some ex Council Houses built in the 1950s and 1960s are among the best built houses – with rooms of adequate size – you can buy (or rent).

    And isn’t it time the house building industry modernised itself? How many other industries are stuck in the 1930s? Factory built prefabs from the late 1940s round the corner from me are cherished by their occupants (they’ve been modernised obviously).

    One more point abpout increased demand – more people live alone (by choice or not) nowadays than ever before.

  • It will be good news if transaction numbers go up. Everything else is noise except for those who want to show off a half-baked understanding of macroeconomics.

  • Stuart Mitchell 26th Feb '11 - 6:07pm

    @Simon: “you all want controls on how much the banks could lend. which is odd becuase the vast majority are actually not having trouble fifnancing these mortgages, repossessions are still very low. ”

    Low-ish, though the latest figures out two weeks ago showed that repossessions are at a 14-year high. With half a million job losses in the pipeline and interest rates certain to rise, expect the figures to go up again. If interest rates were to return to 1990s levels can you imagine the mess millions of people would find themselves in?

    The excessive lending certainly contributed to rising prices as it effectively shunted the demand curve over to the right. It wasn’t the only factor but it was a major one.

    Even with the huge mortgages on offer, most people I know who bought houses in recent years had to rely on borrowing huge amounts of money from their parents, many of whom presumably remortgaged their own properties. Unless there is a big adjustment in the market, kids who start with nothing have very little hope indeed of ever affording anything better than a hovel.

  • Stuart Mitchell 26th Feb '11 - 6:51pm

    Mark: Apologies, I completely messed up and was in fact looking at the figures from 12 months ago!! (http://news.bbc.co.uk/1/hi/business/8510077.stm)

    But just to prove that it’s always possible to find an alternative point of view :-

    http://www.thisismoney.co.uk/mortgages-and-homes/article.html?in_article_id=523219&in_page_id=8

  • Simon McGrath 26th Feb '11 - 8:44pm

    @steve are you suggesting the fact that there are millions of addional people needing housing has had no effect on prices? odd

  • Personally I’d love it if house prices fell substantially as currently I might never be able to afford my own home or even to rent a decent one.

  • MarK:

    It depends why they fall or rise.
    – If they fall because we have gone into a double dip recession, that is bad news.
    – If they fall because % have risen, and more people have had their homes repossessed, and have been sold by banks at fire sale prices, that is bad news
    – If they fall because the mortgage market deteriorates further, and even fewer people can get loans, that is bad news.
    – If they rise because we build no homes, and scarcity drives prices up, that is bad news

    What would be good is if we built sufficient houses so that even when the economy recovers, and even when first time buyers and those wishing to move to a larger house can get a mortgage under reasonable terms, house prices still fall by 0-2% in nominal terms, as an average over the country. This is small enough to prevent negative equity, and large enough that in the context of 4% nominal wage rises (standard in the medium term – 2.5% inflation + 1.5% real wage growth), affordability increases by about 5% or so a year, or about 30% over a parliament.

    Note that under these conditions private rents would fall by about the same amount, which would also cut the housing benefit bill by about £3bn per year – a useful saving. Also, as private rents and prices fall, more people choose to move out of social housing, freeing up social housing for those on the waiting list.

    Under current policies this is unlikely to happen. There was been no bubble in housing in the UK – if there had been, prices would have fallen a lot more recently, as loans became hard to get. Instead we have high equilibrium house prices, caused by big shortfalls in supply under a planning system screwed up by Major and maintained by Blair/Brown. The current falls should be seen as a “negative bubble”, that is a short term trough caused by problems in the financial markets. The Herriott Watt house price model predicts house prices will double in real terms in London by 2025 (with smaller rises elsewhere) by 2025, when they will reach £500,000 in today’s money.

    That would not be a good outcome, which is why we need supply side reform that gives local councils and local communities big incentives to support development. The LibDem policy of Community Land Auctions, outlined here: http://www.ft.com/cms/516ecf08-3a0f-11dc-9d73-0000779fd2ac.html remains the best way forward, and one that we should be fighting for inside the coalition.

    Tim Leunig, LSE & Chief economist, CentreForum

  • “Under current policies this is unlikely to happen. There was been no bubble in housing in the UK – if there had been, prices would have fallen a lot more recently, as loans became hard to get. Instead we have high equilibrium house prices, caused by big shortfalls in supply under a planning system screwed up by Major and maintained by Blair/Brown. The current falls should be seen as a “negative bubble”, that is a short term trough caused by problems in the financial markets. The Herriott Watt house price model predicts house prices will double in real terms in London by 2025 (with smaller rises elsewhere) by 2025, when they will reach £500,000 in today’s money. ”

    Astonishing. Do you live in this Country? Have you been looking at prices over the last decade? It wouldn’t be a bubble if it wasn’t for irrational behaviour, so in a way the bizarre justifications you’re giving confirm that prices are still in a bubble and that is why they will continue to deflate. The housing market is notoriously slow and we’re still seeing the effects of the changes in lending practices feeding through the system. It isn’t possible to draw any real conclusions about the sustainability of house prices until transaction volumes have returned to their trend. At the moment they are around half the normal level – and clearly won’t increase until prices fall significantly – afterall, the vast majority of homeowners have little or no mortgage debt, so there’s no reason for them not to drop the asking price significantly.

    My wife owns two houses. In both areas, prices are now below the 2009 trough. Just over 20% in one area and a straight 40% in the other. That’s the reality of the housing market, despite the enormous amount of support being given to prop it up. To say there wasn’t a bubble is just plain ignorant. Prices may well have held up in London (do you ever travel outside the city?), but that’s because an entire failed industry has been bailed out by the taxpayer – a situation which, by definition, is unsustainable in the long-run.

    @Simon McGrath
    “@steve are you suggesting the fact that there are millions of addional people needing housing has had no effect on prices? odd”

    You mentioned 3m people, without mentioning the 60m that live here. So the population went up by 5% – that doesn’t explain why house prices went up, over only a few years, by around 150%-200%. It explains only a very small proportion of the increase, and probably only in the south-east. I lived in Newcastle from 1995-2005, during which time the population went down and many more houses/flats were built. According to your theory, prices should have fallen. They didn’t – they rocketed. Nothing to do with supply. It was the demand – in the form of unsustainable, easy credit. Look at the evidence.

  • The house price to earnings ratio plot on the Nationwide’s latest index release ( http://www.nationwide.co.uk/hpi/historical/Jan_2011.pdf ) is a good basic guide to where prices are and where they’re likely to go over the coming years (the house price/rent ratio is very well correlated with this plot, as rents have remained more or less flat in real terms for several decades whilst house prices have gone up and down in cycles).

  • For clarity, that’s over 20% and 40% fall from peak in my earlier comment.

  • David Evans 27th Feb '11 - 6:43pm

    @Tim Leunig

    I think it will be a lot more difficult to get the good outcome than you indicate. We all have to realise that we have been living on credit, as a nation and as quite a large number of individuals, for many years and, unless we make ourselves more competitive, the concept of wage rises in real terms will just be a pipe dream.

  • I don’t understand how Tim Leunig’s outcome can be described as ‘good’, given that houses are outrageously overpriced. Why is it good that those who took out huge loans should avoid negative equity? They chose to buy a house at that price; nobody forced them to. They are adults and are responsible for making decisions about how much something is worth. A house is worth what someone is willing to pay for it and what someone is willing to sell it for; it’s called a market. Why should those that bidded-up prices in the first place be bailed out at the expense of those who would like to buy at an economic price?

    If you’re going to have a free market, then it’s necessary to allow prices to fall in the same way they were allowed to rise, otherwise it is not free. Personally, I prefer intelligently regulated markets, especially when it comes to something as essential as housing that is based on artificial scarcity of land created by speculators. Two obvious ways to prevent future boom/busts would be to introduce a sufficiently high land-value tax (in place of other taxation) and cap mortgage lending either on income multiples, or better still, on rental yield multiples. Given rents are much more stable over the long term, then a rental multiple of e.g. x9 annual rent + 10% deposit would easily prevent all large boom/busts in house prices in the future. However, for this current boom/bust, prices were allowed to rise to insane levels and they should therefore be allowed to fall, before introducing regulation to prevent them rising unsustainably again.

  • @David Evans
    “the concept of wage rises in real terms will just be a pipe dream.”

    The last figure I saw for average wage inflation is 1.7%, which is way below CPI/RPI, meaning that even in the highly improbable event of houe pricesstagnating at today’s level, they would not become more affordable with time in any way whatsoever.

  • Steve: Negative equity harms labour mobility, which reduces economic growth, and means that banks hold assets that are worth less than the loan, which makes the bank insolvent – and then we all pick up the pieces for that, since savings are protected in law. For these reasons it is usually best to avoid widespread negative equity if we can, and since affordability (rental and purchase) can be improved by about 5% on average per year, we can have more affordable housing and avoid negative equity.

    We will just have to agree to disagree on the rest. Overall the housing market is 17.7% down at the moment (Halifax peak to today), it is easy to imagine that when the problems in the mortgage market reduce, prices will rise by that amount.

    Best wishes, Tim

  • I would argue that the effect of high houses prices has done far more to harm labour force mobility than a few people in negative equity. Both of these negative factors on mobility have occurred as a result of prices that were allowed to rise by a stupendous amount, despite Brown’s promise at the beginning of Labour’s term in office that houses prices would not be allowed to spiral out of control.

    Wage inflation is currently extremely low, so it would take decades for today’s house prices to return to mean affordability levels through wage inflation alone. However, the price of everything else is going up much faster than peoples’ wages, thus reducing the amount available to service a mortgage. I can’t see how stangant prices can increase affordability at today’s inflationary environment.

    What are the problems in the mortgage market ? The only problem I can see is that sellers are reluctant to reduce their asking price, so transaction volumes are absurdly low. Mobility is a function of the demand as well as supply and the current poor mobility will hinder the recovery and employers will have difficulty attracting workers to areas where prices are high. High prices, therefore, thwart economic recovery, causing the economy to slow, causing prices to fall. There’s no escape. Also, if prices fall then there is less risk to the lenders (because of improved affordability) and they can then lower their deposit requirement (so mobility is improved by lower prices AND lower deposit requirements). As I said earlier, if prices fall substantially then the vast majority of homeowners would still have substantial equity and could easily sell. The improvement in demand by a fall in prices easily outweighs the fall in supply through the small minority in negative equity, so labour force mobility improves with falling prices.

    Given the amount the banks owe the taxpayer as a result of the previous unsustainable lending, when do you think they going to start lending such amounts again and why do you think this is a good idea?

  • Matthew Huntbach 28th Feb '11 - 10:48am

    One need only glance at almost any of our national newspapers to see that they are almost all written from the point of view of the very rich, and largely see the world in their way. That applies even to the Guardian, which likes to think of itself as left-wing but when caught in a conflict between those who are poor or average in wealth and income and the liberal metropolitan elite, always ends up siding with the latter. As an example of this, consider its recent coverage of cuts in LB Camden spending. Property-owning Camdenites are the sort of people the Guardian is written for, that is why for all their fuss you have not seen them suggesting that a big tax on the capital gains property-owning Camdenites continue to enjoy might solve the “no money left” issue. There is a HUGE hypocrisy in Camdenite commentators moaning about cuts in libraries and social care in the borough, but sitting on properties that will deliver huge dollops of cash to their heirs. The Sunday Guardian (aka Observer) even ran a campaign against inheritance tax.

    The very rich almost always own property and so see its rising in price as naturally a good thing. There is no national voice for the young and poor who don’t benefit from property price rises.

  • A fall in house prices is obviously good news, and a fall should be encouraged by reducing second-home ownership and the recent explosion of buy-to-let (by means of a heavy taxation on second/multiple-homes and outright bans in some areas).

  • Liberal Neil 1st Mar '11 - 12:27pm

    A steady drop in house prices in real terms back to a more affordable level is, on balance, a good thing.

    For most mortgage holders a slow and steady drop will not create major negative equity problems as they should be slowly reducing the outstanding mortgage amount anyway.

    The Government does, however, need to avoid a crash in prices, and to help those who do get into problems. (Maybe some kind of shared equity scheme or similar?)

    At the same time we also need more housing to be built and to find ways of encouraging more efficient use of the existing stock.

  • Zoopla latest said house prices are going up in my postcode area. Great for those who can afford a second or third bedroom, however, firstly, demand for these is not as great as starter homes which explains the number of conversions to apartments and secondly, first time buyers are priced out of the market for many one bed flats and apartments also. The freezes and caps and cuts in wages and salaries and hours don’t help coupled with the rising cost of living. Knock on effect not felt by the wealthy.

    Did our PM wonder why so many homeless slept outside Westminster? Is he welcoming them into his home every night to show how Big on helping Society he is to get them off the Westminster streets, which I’m sure they’re not all on via their own choices.

    Price rises do not help second time buyers in some areas with buying a new home, however, simultaneously, they do help they get a larger deposit from equity. Catch 22!!! They need and average market, first time buyers need a low price market and it could be balanced out by those who downsize and are happy to accept a lower price if the house needs doing up again yet is a good size.

    Food for thought.

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