Tuesday, July 14, 2009

A very British obsession

Can someone tell me why it is that we are so obsessed with house prices?

Or rather, why it is that economists look to house price trends as an indicator of national economic health? You see, as a homeowner, I understand from a home owner's perspective that it is nice to know that the house you are buying is worth more than the mortgage you owe - but as far as I'm concerned, that is as far as it goes.

We live in a nation with a population of some 60,000,000 people but less than 30,000,000 homes - it is hardly surprising, given the levels of new immigrants arriving and the boom in people living alone, that house prices tend to trend upwards even in the deepest of recessions.

But as an indicator of economic health they are largely irrelevant - or if they are relevant then increasing house prices should be a worrying sign because that inevitably means more people taking on more debt and with the debt burden already at unsustainable levels I don't think that is a particularly good idea.

However, it seems that the economists - and our government too - think it is. Why?

I think it is because they believe that this is the only way to maintain the living standards we are used to - by borrowing more and more money based on the future value of our property. That is the only place our "wealth" can come from now - the land and the assets that sit on it. We don't produce enough of anything anymore to maintain a proper economy so we have to grow our economy by borrowing more and more money.

I think this is crazy and will, eventually, come back to haunt us dreadfully.


Pavlov's Cat said...

I'm with you on this Stan, my brother and I were dicussing this over several pints a while back.

When did houses stop being homes and became assets?

We think it was around the mid 80's and the 'right to buy'

North Northwester said...

"We think it was around the mid 80's and the 'right to buy'"

Nah - that just let more people into the game, as many Thatcherite measures did.

House-buying had long been a good way to increase your paper 'wealth', and like today it worked because of inflation.
What you did in the 1960s and 70s was to take out an endowment mortgage and, thanks to government inflation of the currency lo and behold when the endowment matured it was worth way more than the original tiny mortgage, so you got a profit - that would enable you to 'buy up' or spend/invest the difference.

The Brown housing bubble was just the same: unfunded by sufficient growth of production or quality in housing, the State encouraged [allowed reckless selling, lending and borrowing] the bubble to emerge from the strong house sales of the Thatcher years.

Brown called the regulators off the mortgage lenders and underfunded sharks like Northern Rock came along and ripped us all off.
I remember trying to sell honest mortgages against the mysterious and awesome Northern Rock and losing pretty much every sale.
But Northern Rock was very very close to the Geordie establishment [which included labour MPS] and anyway all that lovely Stamp Duty allowed Gordie to spray cash at his unionised public sector hordes, and so it came to pass.

People will always be greedy and speculate in daft ways but it only becomes a nationwide disaster when the government rides the wave.

These are conservative arguments against housing bubbles I should point out; based on experience at the time rather than abstract libertarian ones, based on rights theory.

Stan said...

"People will always be greedy and speculate in daft ways but it only becomes a nationwide disaster when the government rides the wave."

Probably the most succinct and accurate summing up of the "credit crunch" I've ever read!

North Northwester said...

They call us pain talking Oop North.