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Last Updated: Wednesday, 29 September 2004, 18:05 GMT 19:05 UK
Why I'd like a house price crash
Evan Davis
Analysis
By Evan Davis
BBC economics editor

A couple look in estate agent window
Out of reach: High prices can deter first-time buyers
One of the more striking features of the recent housing bubble has been the proliferation of house price measures.

When I started at the BBC, there were only two each month that we got close to reporting - the Halifax and Nationwide ones.

Now they come in almost daily - RICS, FT, Rightmove and Hometrack, the works.

Add the debt figures (more than one source there too as it happens), and we could comfortably devote a 24 hour satellite TV channel to reporting them all.

Indeed, some media outlets (including some at the BBC) already do run almost weekly commentary on the state of the housing market.

No matter that it is mis-leading to report house price rises repeatedly (giving, say, the figure for August house price rise five different times with five different surveys offers the false impression that house prices are accelerating).

No matter that monthly measures of house price jump all over the place. We keep reporting them, because people keep reading them.

I would not mind if my property fell from its current inflated value to, say 25p
Evan Davis
But if we are honest about it, the correct thing is not to view the housing market as similar to the stock market, where even a 20 minute delay on price information is a disadvantage; the correct thing is to view the housing market as one where judgement needs time.

Slowly evolving picture

No single month's figure is interesting, even if confirmed by five different surveys. It's the broad, slowly-evolving story which matters.

Now interestingly, at the moment, it seems we are in the position of being able to tell a story about the housing market - one that is "broad" and "slowly-evolving".

Stock market traders
Frenzied trading: Rising shares means more than rising house prices
Yes, the multiplicity of surveys is at last coming in useful - because using more than one month's data from more than one survey, we can piece together a picture that suggests the housing market is cooling down.

There have been false stops and starts before, and we may be wrong. But it is at least logical that house price inflation should be slowing down, given that mortgage costs have risen by about a fifth in the last year.

That seems to be having its effect on lending, which should have an effect on home buying too.

A cause to celebrate?

Your average house-price obsessive may go into mourning, believing the days of sitting back and getting rich may be over. But your average house-price obsessive may be wrong to be upset.

The reason is that the very people who are most likely to watch house prices by the minute, hoping they'll go up, are paradoxically the young recent home-buyers who stand to gain most if house prices drop.

This often comes as a surprise to people. But it is not some super-sophisticated financial hokey-pokey that generates this finding.

It is simple financial logic, that surprisingly gets lost in the welter of nonsense spoken about housing.

A couple talks to estate agent
Do high prices benefit anyone?
The reason is that while houses form the main part of our wealth, (hence we feel richer when their value rises) they also form the main part of our liabilities, in that we require one to live in for the rest of our days. High house prices help homeowners, but also hurt them.

The younger you are, the bigger the liability you have in terms of future expected housing costs. The more years of future housing demand you have ahead of you.

So recent home-buyers may watch the price of their asset rise furiously, but they need also to watch the price of the houses they are going to be buying or renting in future.

And for young affluent social climbers, the losses from higher prices for the houses they are going to buy outweigh the gain on the house they currently own.

Bring on lower prices

So speaking personally, from a purely selfish perspective, I want house prices to fall.

Even though I am a homeowner and come from a family of home owners. I would not mind if my property fell from its current inflated value to, say 25p. If it did, I could presumably then sell my flat, and upgrade to a nice palace for, say, 10.

Obviously, I'd have to keep paying my current mortgage, but by adding a mere 9.75 to it, I could swap my cramped property for the one that puts me on a par with the Queen.

It's not likely to happen (we don't have enough palaces to meet the demand for them at that kind of price) but it makes the point.

The people who lose out from falling house prices are not house-price obsessives, but those who are elderly, about to trade down, or emigrate.

Or who never expect to buy another house again. People like my parents, who hardly talk about house prices at all. And certainly don't watch them hour by hour.

Now this simply makes the point - again - that houses are not like shares.

When share prices rise (under some circumstances at least) it means we as a society are richer - our companies are going to be more productive and more profitable than we had previously thought.

When house prices rise on the other hand, society is no richer. We have the same houses and the same people to live in them.

Higher house prices simply re-distribute money from those on the way up the housing ladder, to those on the way down, or from younger people who don't own homes, or own small ones, to their parents who own family property.

What we now maybe seeing, is the end of the unintended and arbitrary redistribution of the last few years.

Is it anything to worry about? Not yet it isn't.


Do you agree with Evan - should house prices fall? Or will higher property values make us all richer? You sent us your views:

If house prices were to increase at the same rate as they have done over the last 40 years, in 2044, a modest 3 bed semi in Redhill will cost about 15 million quid! Isn't it time we realised our expectations are just a tad unrealistic!?
Matt, Redhill Uk

This is of course, a double-edged sword. No one wants negative equity, so to a large extent the damage is already done. I personally would like to see a substantial fall, but this will hurt a lot of recent buyers.
Tim Botten, Basingstoke, England

Thank you Evan. Some commonsense at last. A logical view of the housing market from someone who doesn't react to 'fashionable' thinking and asks, like so many of us, 'If house prices are rising does that make our nation richer?'
Carolyn Moore, Headley, Hants.




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