Are falling house prices actually a bad thing?
Britons' obsession with home ownership is somewhat unique, and it is fair to say that many of our friends on the Continent are left perplexed by the importance we attribute to making the step up onto the housing ladder. While there is much stigma attached to a life of renting on these shores, it is commonplace in counties such as France and Germany.
Equally, our perspective on house prices, some would say, is rather warped. Rising house prices are widely celebrated, and regarded as a reflection of economic strength - while the converse gives us jitters, and can lead to knee-jerk economic policy.
News that asking prices fell 0.1 per cent last month (according to Rightmove) fits the trend of stagnation in 2018, and estate agents are suddenly finding their shelves full, with fewer buyers coming to the table. And many people are concerned as a result, convinced that it is a portent of economic pain to come.
It hasn't always been this way
Interestingly, our infatuation with increasing house prices is a relatively novel one. In the post-war era, where housebuilding occurred at a rapid pace - coupled with the fact that controls on lending were strict - house price growth was generally subdued, and few people thought much about it.
However, since the 1970s, the combination of financial deregulation, lower build rates and favourable tax rules for homeowners have all contributed to an explosion in the cost of property. In fact, the average house price has rocketed from just over £50,000 two decades ago to around £220,000 today. To give that some context, this means the house-price-to-earnings ratio in 1995 (based on the average UK salary) was roughly 3:1, whereas today it sits at around 7:1.
One intriguing suggestion to emerge last week came from the think tank IPPR, who posited that the Bank of England should freeze house prices for the next five years by limiting mortgage lending. This is Money editor Simon Lambert took this a step further, pointing out that house prices would need to drop by 30 per cent in order to reach 'fair value'.
At a time when interest rates and unemployment levels remain at historic lows, such a possibility is less than remote in the absence of radical (and implausible) intervention. And of course, a rapid decline would have terrible consequences for many people, whose home is by far their most valuable asset. But it is conceivable that, despite an acute housing shortage, we may yet see a natural, sustained period of sluggishness in prices, as the economy deals with various uncertainties. Could anyone legitimately claim that this would be unequivocally negative?
Perpetually increasing house prices have been a blocker on social mobility, carved out an inter-generational divide, and reduced owner occupation by more than 6 per cent in the last 15 years alone. Added to that, they are actually a major economic inefficiency. All the extra money spent on housing could be reinvested elsewhere, or used to provide spending stimulus to an array of other industries.
A significant period of flat house prices would allow wages to narrow a gap which has mushroomed in recent times, but also provide the powers that be with a window of opportunity to recalibrate regulations so as encourage housebuilding, improve the correlation between building rates and downward price pressures, and ultimately create the basis for a more sustainable market.
Slow is smooth
Intervention isn't always the answer to market failure. In the same way that schemes such as Help to Buy have pumped up house prices, many would rightly be loath to see drastic policy implemented which causes a shock. However, the present cooling off of house prices may be a sign that the market is naturally righting itself.
The important thing is that we as the wider public - even homeowners among us - do not perceive this as cause for panic, and, certainly, it should not be a prompt for policymakers to fight against a correction by artificial means. The lessons of the not-too-distant past illustrate that an economic model dependent on regular bursts of rocketing house prices is one built on sand, and the consequences down the road will only be more severe.
Without doubt, falling house prices would have terrible ramifications for many people in terms of negative equity, and perhaps even repossessions in some cases. Championing a slump is therefore only a stone's throw away from schadenfreude. But a period of a few years, where homes become more affordable as their cost flatlines, and wages grow? It would be tough to argue that this would do more harm than good, given the current imbalances of the market.
Our website offers information about saving, investing, tax and other financial matters, but not personal advice. If you're not sure whether peer-to-peer lending is right for you, please seek independent financial advice, and if you decide to invest with Lending Works, please read our Key Lender Information PDF first.
Since opening our doors back in 2014, we’ve always prided ourselves on living and breathing two key principles at Lending Works: innovation, and putting the customer first in everything we do.
Wednesday’s Budget speech, coupled with the cut to Bank of England rates, represented a decisive response to the coronavirus. Here we analyse the impact it will have on mitigating disruption from Covid-19, along with the long-term implications of this significant fiscal stimulus.
Rumblings from the Treasury ahead of next week's Budget suggest tax grabs will be needed to fund increased spending, and it appears UK enterprise could be in the firing line. Here we articulate why targeting entrepreneurs and small business is ill advised.
In a difficult climate, customer acquisition and lead generation present stern challenges for UK retailers, and a great deal of marketing spend invariably gets directed towards getting feet through the door.
Over the last decade, there can be little dispute that the reputation of mainstream banks – and particularly the so-called ‘Big Four’ (HSBC, Barclays, Lloyds and RBS) – is at its lowest ebb.
The 2019-20 ISA season has been a damp squib, with banks disinterested in attracting savers’ cash, rates cut, and the stock market in freefall. However, the emergence of the IFISA means alternatives beckon for those seeking a stable middle ground in terms of risk and reward.
In a decade of slow recovery, the rapid rise in asset prices has been the standout. But how sustainable has price growth been, and could we be in the midst of a bubble?
Most people consider income tax to be a given, but in the UK it is barely two centuries old. In this article, we look at how this tax has developed over the years, and also why it is set to remain at the core of our tax system for many decades to come.
Open banking celebrated its second birthday last month, but has the ‘revolution for financial services’ that was promised actually come to pass? In this article, we look at the progress the initiative has made so far, and what the future holds in the face of high levels of scepticism.
On the face of it, a 'broken' energy market needed fixing, and the price caps introduced in early 2019 were heralded as the solution. But, one year later, have they actually helped consumers save?