Tuesday, 1 March 2011

House price conundrum

The weekend debate over on the Lib Dem Voice this week was on house prices - should we want them to go up or to come down?  I am unsure whether or not I can look at this objectively, as it is in my best interests that they fall.  I am a mid 20s professional with no realistic hope of being on the property ladder any time soon.  That said one of the main reasons for this is the area where I have chosen to live.  I can't imagine house prices around the Bath area falling no matter how much national downward pressure is applied.

Thinking in general however I still can't see past price stability being preferable so in real terms prices are declining.  I feel personally is that a major problem in this country has been the reliance on debt where often property has been used as collateral to fund an unsustainable standard of living.  At the same time it is too hard for others to get their first foot on the property ladder, this helps to maintain the inequality in society.

The key ratio is house prices to earnings, the graph illustrates how over the last 10 years this increased ridiculously and even the crash of 2008 didn't bring this down to it's previous level.  In the current economic climate pay for the majority of people is remaining constant or even decreasing so any increase in house prices would push them further out of reach for a lot of people.

The problem is there will always be demand for housing and in an unequal society such as ours even when the majority of people cannot afford the prices there is always likely to be someone willing to pay the price, whether they see it as an investment or a way to obtain additional income.  The only way I can see this changing is if policies are put in place to increase the supply of housing (more supply - lower equilibrium price) or to put restrictions on home ownership where people do not reside in the property, this however would penalise renters.

There is also the problem that if house prices fall then people could find themselves in negative equity, this can have disastrous effects on families and as such could not be desirable.  

No matter what happens there is always winners and losers.  Falling prices can have disastrous effects on people's lives where as rising prices helps to form a clique of home owning elite.  That's why stability where over the long run the ratio falls back down towards the more sustainable 3-3.5x earnings is what I would find more desirable.  However I can't see this happening.

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