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If house prices really are over-valued by 30%+, as you (or those you are commenting upon) suggest, then house prices will fall - and ought to fall. For if an asset is over-priced, what ought to happen is that its price falls. This is a good thing for those that want to buy and employ the asset, and saying that the asset is over-valued is equivalent to saying that the interests of buyers in the price falling outweigh the interests of sellers in its not falling.

House prices have borne a traditionally fairly close relationship to consumption - whether as cause or effect is debated, but let's set that aside for the moment. In about 2003/4 this traditional relationship broke down. If we adopt the language of house prices being the cause of consumption, then we might say that by 2003/4 house prices had just risen so high that people didn't want to spend to take advantage of the extra borrowing (say) that having equity in a house allowed. Since then house prices have risen considerably further. What this means is that house prices could fall something of the order of 10% - perhaps even a little more - without there being material negative consequences for consumption.

However, if house prices fall 30%+ then there will be very material short-term consequences for consumption.

On the other hand, suppose that house prices are 30% overvalued, as you suggest, but that they will not fall materially in price, as you suggest. Then the inefficiency this would introduce (discouraged buyers) would impact negatively on consumption over a much longer period - the easiest way to see this is by thinking about someone buying a house in an over-valued market, and so having to devote a great deal of money to the mortgage. This money then isn't being spent on consuming other thing (or alternatively isn't being spent on investment).

If house prices are 30% over-valued, we have a choice between short-term pain whilst the market corrects (prices falls), after which we can get back to solid growth, and long drawn-out pain if prices do not fall.

Perhaps we'd better hope they're not actually 30% overvalued...?

The Tory response to the housing issue is weak.

We need to build tens of thousands of new homes by massive deregulation of planning laws.

Much greenbelt isn't attractive. We shouldn't protect it.

We should do as Ferdinand Mount recommended and ensure nearly every Briton owns a home.

Such a Britain will be much more responsible.


Yet in many parts of Europe, home ownership is nowhere near the current levels of the UK, yet they do not seem to be less responsible than we are in Great Britain.

No, the answer is to ensure that those who wish to be home owners have the opportunity to be home owners, rather than as you are suggesting, make it almost a compulsory social engineering project.

There is a school of thought which suggests that many of our current crop of home owners are far from responsible, using their homes as security to fund a binge of wreckless borrowing.

Land value tax (coupled with abolishing all existing property taxes) is the best solution to the housing crisis. Reduced immigration would be another good idea.

One thing about the housing market is that people have got predictions about it wrong for may years. A few people were predicting a crash as early as 2001, then there were the 2003 bears (like Andrew Walker (May) and Roger Bootle (December)). Then there was the mainstream of bears in 2004 (including me and the MPC) - indeed the 2004 bears thought themselves correct right into 2005, for the housing market flatlined over about a ten month period.

It's worth just reflecting for a moment on the 2004 debate. Those of us that took the 2004-turning-point view conceded (unlike the 2003 crowd) that there had been certain important changes in the housing market that could sustain a higher house-price-to-earnings ratio than in the past - more secure employment prospects, higher long-term wage growth, a general upward drift in the equilibrium level as wealth rose, a longer working life, lower real long-term interest rates, and so on. But when we estimated the plausible range of impacts these other factors might have made, it turned out that house prices were, by late 2004, 25-40% higher than even the upwards-adjusted equilibrium. This was pretty much the consensus - shared by the IMF, OECD, PWC, Capital Economics, me, Uncle Tom Cobbley and all.

The one point of debate was how the housing market would get itself down those 30%. I believe that, though people make mistakes, markets are by-and-large efficient, so that if prices are too high they will typically fall - and that was what I expected in this case (this would have been a scenario in which there was a year or two of below-trend economic growth, perhaps even negative growth, after which the economy would return to normality).

Others take a different view of the economy, according to which it can become trapped in inefficient quasi-equilibria that can only be escaped from by inflation. These people believed that the housing market would be unable to correct efficiently through nominal price adjustments, and that instead prices would stagnate for many years whilst wages rose gradually to correct the disequlibrium in house prices (this would have been a grim scenario involving low economic growth for many years).

We were all wrong. The bears were wrong. Prices did not fall. The "soft landing" crew were wrong. Prices did not stagnate - they rose. No-one understands why. It just *can't* be the case that prices were over-valued 30%+ in 2004, and then rose another 15%, surely? Surely people haven't been *that* stupid?

So we missed something. The main thing I've been looking at is whether we all underestimated the possibility that there had been a sudden step change in people's expected working lives, at around 1998. I had included an adjustment for increased working life, but I have assumed it would rise gradually, not suddenly jump. If, say, in 1998 people started thinking they would retire at 72 instead of 62, that would have had a very effect on equilibrium house prices.

The blunt truth is that most bears have no better story than they had in 2004. They don't know why they were wrong then, and yet they have not seen any reason, really, to suppose that they were *fundamentally* wrong. I believe that it is pretty much a mainstream opinion, but one that has become less-and-less expressed since 2004, that house prices are over-valued by in excess of one third. If that is *really* so, then house prices will fall. And if that is really so, they could well fall 30% (even though that would represent over-shooting).

Such falls would re-invent the first time buyer and end affordability discussions and all the nonsense of a "housing crisis" (incidentally, contra what is said above, there is no *current* issue of under-provision of housing in the UK. The issue of allegedly too little house-building relates to the future, not to today - at present there is still a healthy surplus of dwellings over households). The political pressure to build all over the South-East would also, I suggest, largely disappear.

Over the medium-term this would be a good outcome for the economy - we are collectively better off if the things we buy are cheaper. But in the short-term there would be economic consequences that would leave Labour's claim to economic competence as shaky as Gordon Brown's hands at PMQs.

Alan S, no, we will never be able to build enough houses when people are pouring in across our borders.


There is also the question of sustainability, if the dire consequences of global warming are half what the British establishment are suggesting, then it is utter madness to be increasing our population when we are already dependent on food imports and energy imports, let alone later when food supplies are tight, energy cost astronomical, and we have a population of 80 odd million!

Totally agree with Iain, totally disagree with Alan S. This governments plans on planning are a total disaster.
There will be large scale building on flood plains which if current trends continue will be uninsurable and there is a severe lack of infrastructure to cope with excess poulation.
We should be doing everything we can to restrict housebuilding in areas of high population density to just social housing.
The sad fact is that population increases that we are seeing are completely unsustainable.
A housing price correction will be painful, it is also probably necessary.

Alan S 10:58 "We should do as Ferdinand Mount recommended and ensure nearly every Briton owns a home. Such a Britain will be much more responsible".

It would be good to think so, but I doubt the correlation is that strong. People own all sorts of things already, but responsibility is a commodity that's in short supply. Why should we expect house ownership to make any difference?

Iain 13:44 has it right. The government's building plans are unsustainable and take no real account of the effects of such a housing and population explosion on the local and national infrastructure.

I work in the industry. The credit crunch which is about to roll over us is going to be brutal.

The bond market just stopped. LIBOR is almost stagnant.

Nobody is lending. The buy to let market has just stopped with thousands of shoddy thrown up overnight inner town/city flats which were built specifically for this market coming on stream.

Over a million fixed rate deals will end in 2008 and if you have any missed payments at all or are on a high multiple you will not be able to re-finance period and will have to lump whatever rate your lender puts you on.

I know a HIPS inspector, he has done 5 jobs to date, 4 being repossessions.

This crunch will take Labour down for sure but I'm not sure I would want to be in power when the pieces need picking up.

Mike H, the people promoting mass immigration must be either global warming denialists, or else the British establishments mass immigration policy is proof there is no such thing as global warming, for the two polices cannot in any way be squared with one another

I agree Tim. The Business is a superb read.

Iain 16:38 "The people promoting mass immigration must be either global warming denialists, or else the British establishments mass immigration policy is proof there is no such thing as global warming, for the two polices cannot in any way be squared with one another".

Sorry Iain, I don't really understand that bit.

Are you making the point that because the majority of immigrants come from poor countries, on their arrival in the UK and exposure to western levels of consumption, they will eventually become greater consumers than they otherwise would have been in the country of their birth, and so make a larger contribution to climate change?

If not, I don't understand how immigration is in any way a factor in climate change. The movement of people around the planet doesn't affect climate change unless my earlier point holds true. Unless, of course, we all move to the Arctic or Antarctic, in which case the world's energy requirements would rise. ;-)

I do completely agree with you on your point about food and energy supplies. In a world that could well be increasingly politically unstable, being so reliant on imports for the essentials of life is not a good place to be.

Ooops - apologies to all for dragging the debate off topic in my last comment. I clean forgot we were supposed to be discussing the impending housing crash.

A price crash isn't a terrible thing. For me, looking to "upsize", it is in fact a good thing.

What does the damage is uncertainty. Can we please just wipe 30% off the value of our houses and move on?

'Can we please just wipe 30% off the value of our houses and move on?'

If you have remortgaged to the max then er... no!

Yet another sterile debate that does not recognise the dominant affect of ARTIFICIAL population growth - the vast propotion of it from the EU. The native population level if left to itself would reduce slowly towards what should be a sustainable level of 30m, Instead we are cramming more folk in and the law of dimininshing returns has kicked in. Quality of life is now declining - open space - open roads - waste disposal - water supply - energy supply - flood risk - community structure - and on..and on....and on....

If the market were not being swamped by population dumping, it would adjust itself.

It does look like we are heading for some stark re-adjustments with house price falls. On the issue of immigration, there is a point here. It is frankly mad for the Govt to propose building so many extra houses (many on flood plains) while letting in hundreds of thousands of migrants! Combine this with the readjustmenets in affordability and the Govt seems to be blindly playing around on the edges of the market.

The only supply problem in the housing market is in the supply of houses that aren't at least 40% overvalued on all sustainable, historic valuations.

House prices are in a bubble caused by the easy availability in recent years of cheap credit. That credit tap has now been largely turned off and the house price bubble will burst as a consequence.

There will be no squealing about the shortage of homes when the spending frenzy finally subsides and would-be buyers will return to having to save for a decent deposit before they can borrow 3 to 3.5 times max on their income instead of the reckless multiples we have seen in recent times.

As for the politicians, the less they intefere the better. The market will sort itself out as always.

The old 3 times earnings calculator was the norm in the 80s when interest rates never got below 7.75% - and even that was short-lived thanks to Lawson's economic failures. As interest comprises almost 95% of initial payments on a standard repayment mortgage, an increase in the multiplier is sensible in times of generally lower interest rates.

That said, the problem is that we have failed to accept the need to build more homes around existing settlements as we have changed from local workers to commuters. It has always seemed strange to me that people complain about the local school/shop/post office etc closing, then fight tooth and nail against even the smallest new home being built in their un-spoilt, but presumably shop/school/post office devoid, hamlet, despite those homes potentially providing more local demand for the very school/shop/post office threatend with, or even already, closed.

The Thames Gateway is a good example. In the Essex part especially, the land around towns like Basildon and Southend is flat, or low agricultural value and ripe for development. Given suitable supporting public transport to get the working members of the community to the local train stations, which are less than an hour from the City of London, they could become thriving villages and communities again. Yet the Green Belt constrains them and the outlying hamlets and villages lose their schools etc. You get my drift.

Government should invest in the infrastructure to support expansion of settlements, or even new settlements around good transport links, including roads, then let the market build the homes that are demanded.

Instead, this Governemnt builds iconic buildings like the Dome in the hope this will miraculously raise values to pay for the infrastructure they will not provide, or crams rabbit hutch size dwellings suitable only for singles and young couples into already over-stretched town centres. What, pray, will happen when these couples have children? Oh, sorry, they already have.

We are facing a huge crisis already in London with 200,000 families in social housing living in officially overcrowded accommodation. Yet Livingstone still insists on 1 and 2 bedroom flats being built everywhere.

Build houses with gardens for families and then let those families buy their social homes bit by bit. Recycle the cash released into new homes and re-house singles and young couples in the homes the families currently living in overcrowded accommmodation move out of.

It ain't rocket science and done right, it actually turns a profit!

If you have remortgaged to the max then er... no!

The value of your house does not affect your ability to pay your mortgage. Negative equity only comes into play if you cannot afford your mortgage repayments or if you want to get off the housing ladder.

The widespread damage to the economy is done by the reduced volume -- economies rely upon money moving.


I would say there are significant differences between the housing market in 2003/04 and 2007/08.

Look at the payment burden for example. The sum of interest and capital repayments. This was way below long run trend in 2003/04. But now it is significantly above trend.

I'd say therefore there are signifcant differences between today and 2003/04 and why calling the market now is not so foolish.

But I guess we also have the huge benefit of hindsight too!

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