House prices and spin

The government has stuck to its idiot view of house prices – it believes they reflect whether enough new houses are being built or not. All the time house prices were rising they told us it was because we were not building enough. They used the rise in prices as an excuse to demand the concreting over of the South-East, against the wishes of many electors whom they attacked as Nimbys.

Now house prices are plunging, on the same logic, the government should be saying it shows too many houses are being built. They should be welcoming the savage cuts they have forced onto the housebuilding industry by their boom/bust credit policies, as that should be the right response to too many houses, visible in the falling prices. They should be scaling back their demands for more construction, which look more and more ludicrous by the day as we watch the housebuilding industry in free fall close down site after site.

Instead, on the BBC this morning prominence was given to a forecast from the National Housing Federation that house prices will rise by 25% over the next five years, and by more in the South-East. This forecast is out of line with the typical forecast of further falls in 2008 and 2009 leading to a substantial drop in house prices, followed by a slow and moderate recovery. The BBC presumably gave it airtime, and on most mentions did not juxtapose it with the gloomier consensus forecasts, because they want to help the government talk the market up. If only it were that easy.

House prices are likely to fall further because the mortgage market has dried up, and because the Treasury and Bank are keeping conditions tight by running off the Northern Rock book and by their approach to interest rates.

I am going to ask some questions of how that forecast was arrived at, and ask Ministers to explain the inconsistencies of their appraoch to housing forecasts and price changes. The government comes across as ignorant of what really makes house prices go up and down, out of control of the money markets and therefore the mortgage markets, but still as determined as ever to force more houses onto the South East than voters want. They should instead reckon on many months of little new building activity and falling prices.

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7 Comments

  1. Neil Craig
    Posted July 28, 2008 at 11:51 am | Permalink

    Rapid swings in prices are indicative of a market where the supply is fixed & independent of supply. Such items go up faster than inflation in good times; they therefore get seen as a good investment & a bubble is created; in due course the price gets so out of line that the bubble bursts; they then get seen as a bad investment, most "investors" get out, if they can & the price falls back to its point on the supply demand curve, bearing in mind that the supply is artificially constrained.

    This happens with old masters, stamps, comics, tulips (in medieval Holland), oil over the current short term etc. The drop in house prices is because people are deciding they aren't going to keep growing at 15% a year.

    A century ago, before all the regulation, houses cost not more than 25% of current prices compared to the retail price index. There is no technological reason why they couldn't again, if government stopped preventing them being built, or preventing mass production methods. I have no doubt that at non-monopolist prices there would be no shortage of buyers & a housing boom that would float the whole economy.

    It is inevitable that, if the state gives people power to prevent their neighbours using their land, it will be used. It would be equally inevitable that if the state gave neighbours the power to prevent you owning a 4×4, or smoking at home, or having sex with somebody you aren't married to some busybodies would use that power. The state should not give such power in the last 3 instances & should restrict the first to areas of historical interest our outstanding natural beauty.

    Reply: Most of the homes for sale are second hand – they determine the price level, which in turn depends on credit availability.

  2. Mark Wadsworth
    Posted July 28, 2008 at 1:43 pm | Permalink

    to demand the concreting over of the South-East

    This is very emotive language, and I think unfair. By surface area, the South East is only ten or fifteen per cent developed. And if you were a housebuilder, where would you most like to build?

    What we need is liberalisation of planning laws (the carrot) and Land Value Tax (the stick).

  3. Matthew
    Posted July 28, 2008 at 2:28 pm | Permalink

    Could you explain why you think high levels of government borrowing lead to higher interest rates, but high levels of government house building (or the lack of) do not affect house prices?

    Reply: Government borrowing is large and so has a large impact on the market. The consturciton of new homes is small compared with the stock and sales of second hand homes, so it has little impact.

  4. Mark Wadsworth
    Posted July 28, 2008 at 3:57 pm | Permalink

    Matthew, that's the funny thing. Ireland and Spain were building (pro rata to population) about five times as many houses as we were in the UK over the last ten years, and their property price bubbles were just as bad (exacerbated by silly low Euro interest rates).

  5. Matthew
    Posted July 28, 2008 at 6:39 pm | Permalink

    It seems hard to believe if we had a genuine free market in land and houses we would not have more of them than we do at the moment.

  6. Neil Craig
    Posted July 28, 2008 at 7:14 pm | Permalink

    Though everybody in Spain is worried about prices falling & though there are 22 million homes for 16 million families, no real crash appears to be happening. http://en.wikipedia.org/wiki/Spanish_property_bub

    This may mean that the Spanish are well off or that their houses are more affordable, or that most of their market is buying for use more than speculation. It suggests that allowing building in Britain to climb well above the replacement rate (1% of the market or 290,000) would not exercise a massive downward pressure on prices, which indeed is what John suggested in reply to my first post. On the other hand it would certainly exercise some pressure. Also increasing building by even an extra 100,000 houses would add £20 billion (nearly 2%) to national productivity, plus some multiplier effects.

    If house prices aren't going to fall fast if we build more the idea that it will be destabilising & that there is a real shortage of demand is wrong. If they are then it will become easier for people to get on the housing ladder. I think the first is true in the short term, since increased supply would be only at most, a few % a year. That in the long term it would be 2nd case since increased supply would be substsntial over a decade.

  7. Acorn
    Posted July 28, 2008 at 7:43 pm | Permalink

    House prices are set by the availability of credit – cheap mortgages – to the first time buyers; they set the market margins, even though they are only a small proportion of total market sales.

    The "loan to earnings ratio", that a lender will give a first time buyer, is multiplied – just the same as bank deposits to lending ratios, through the second hand market. The price of their second purchase is set by the factors that governed their entry into the housing market in the first instance. Take away the first time buyers; the market collapses.

    Let's hear it for LAND VALUE TAX. Come on John, you know it makes sense.

    I agree with JR; housing borrowing is small compared to government borrowing.

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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