Hands off our falling house prices

The newspapers are full of stories about the rapid inflation in basic foodstuffs like rice and potatoes. We’re warned of social unrest, new global inequalities, and even the selfishness of speculation (which you can engage in via an agricultural ETF, although I prefer to think of it as insurance against my escalating grocery bill).

Yet ironically, the other economic story making headlines in the UK this week is the tiny fall seen so far in house prices, which comes after a tripling of prices in little over a decade. When it comes to houses, we’re told, stupidly high prices are good.

After an initially reasonable response, PM Gordon Brown has been spooked into promising he will do all he can (which hopefully won’t be much) to halt the decline. Property pundits are ringing their hands about a looming crash even as they phone their estate agents to sell, and banks and building societies are warning that the end of civilisation is but a repossession away.

But consider this: why are rising food prices bad, yet falling house prices not good? We all need somewhere to live, just as we need to eat. Surely we should rejoice that prices are coming down, given all the woes of first-time buyers unable to afford a shoebox on the edge of town, the twenty-somethings unable to leave home, and so on?

I’m not completely naive; I understand that house prices rises have become key to the nation’s happiness. I also understand most readers of Monevator will be home owners, who’ll be at best miffed if house prices fall, and at worst stuck in negative equity. So I’m not going to make any friends here with this point of view.

Nevertheless, my point stands: why should the bursting of the bubble be blamed for falling prices, rather than the bubble that inflated those prices in the first place? If prices fall, it will be because they got ridiculously high on the back of lax lending and rampant speculation. That’s the real story, a story which was barely reported among the Get Rich Quick property programs and Buy-To-Let cheerleading of recent years.

Why wasn’t the nation up-in-arms when Channel 4’s Relocation, Relocation, Relocation urged people to greedily buy two homes instead of one – cashing in their equity from the bubble to buy a place in the city AND a place in the country? This, on an island where, as we’re often reminded, they’re not making land any more?

Why? Because people have swallowed the nonsense that house price rises alone can make a nation richer, and because on some level we’d all like to do the same.

It was never true that house prices running faster than wage inflation was a universal good, as the inestimable Martin Wolf argues so adamantly in ‘Let Britain’s Housing Bubble Burst‘ in today’s Financial Times. Warning the Government not to meddle, Wolf writes:

First, anybody who thinks it is a duty of the state to help keep housing expensive is crazy; second, policymakers should respond only to clear market failures; and, third, with a floating exchange rate and an independent central bank, the UK can weather the storm if it keeps its head.

It is high time the British realised a people cannot become rich by selling ever more expensive houses to one another.

I’m not trying to be deliberately confrontational here: I well remember the grim era of negative equity in the UK, and while I see the current overreaction (particularly from our supposedly level-headed Prime Minister) as unwarranted, I can fully understand the desire to avoid a return to those dark days.

But the law of unintended consequences and the weird dynamics of bubbles suggests it may be best to let nature take its course.

More to the point: even if remedial action were possible, it should have been taken when the bubble was being inflated and people were getting rich by sitting on empty properties or buying off-plan and selling before the house was even completed, not now such lunacy has come to an end.

In urging the banks to immediately cut mortgage rates in response to Bank of England rate cuts, the Government is asking them to go back to the cutthroat margins that first fuelled the credit bubble. By saying it’s their duty to lure in over-stretched first-time buyers, the Chancellor is implicitly asking the banks to return to the very same reckless practices that eventually led to the sub-prime meltdown, and to the ensuing credit crisis.

Happily, my views on housing are no longer deemed the stuff of blogger fantasy. Even the property-puff supplement in The Times has a piece pointing out that for young people made poor by older house-hoarders, prices can’t fall soon enough:

All those buying a property have known [prices are too high] for the past five years at least, and it has then become in their interest to hope that the boom continues. To that extent, property owners have been complicit in the financial recklessness of the past few years: easy credit built on pyramid selling. Buying houses has been a gamble, a cross-your-fingers-and- hope-for-the-best, those-mortgages- are-pretty-generous bet that many of us have indulged in.

Nothing could be more immoral, then, in the current climate, than using government efforts and taxpayers’ money to encourage first-time buyers to enter the housing market in order to stabilise the dodgy situation that banks and incautious borrowers have got themselves into through overlending and overstretching themselves: row, row harder, keep us all afloat! Yet that appears to be what the Government’s strategy is.

Very well said. Read my piece from last year on how rents imply a house price fall, Mr Brown, and then let the market deliver its medicine.