Hard Times for House Prices?

The Evening Standard (London, England), February 4, 2005 | Go to article overview

Hard Times for House Prices?


Byline: ANTHONY HILTON

FIGURES from the Halifax yesterday suggested that if we are in the middle of a housing crash, it has a funny way of showing itself. If the January numbers are echoed for the full year, it would mean a further rise in the cost of the average home of about 13%.

Almost as the figures were being announced, Capital Economics' Roger Bootle, the leading houseprice bear, was locking horns with Sunday Times economics editor David Smith in a debate on whether or not the sector would have a soft landing. Given the personal involvement of four-fifths of the adult population in home ownership, the arguments are worth repeating.

Smith, who thinks there is little-tonothing to worry about, concentrated on the big picture. He pointed out that actual falls in house prices are very rare - they happened in the 1930s and in 1991-93 but both times the drop was only about 13%.

Today the factors needed to bring about a similar fall simply do not exist, he said.

Monthly mortgage repayments are well within people's capacity to pay as long as employment remains high and inflation and interest rates low. Second, the fragmentation of families and other social trends means demand for housing exceeds the supply. Third, overvaluation is much less than commonly thought because prices after the last depression were forced to very low levels.

And overall the economy is in nowhere near the kind of recession that would create waves of forced sellers and kill the market.

But while Smith drew comfort from the big economic picture, Bootle took the approach of an investor.

Housing is a bubble, he said, caused by a collapse of confidence in other methods of saving and by the easy availability of cheap finance.

This has driven the market to levels that are unsustainable. Such booms are always followed by busts and it will be the same this time because too many people have overreached themselves. The financial strains are already showing in that the yield on residential property in central London is now below Bank base rate, the ratio of personal debt to income has never been higher and repayment costs in real terms and without tax relief are a major burden.

None of this seems to matter, Bootle said, as long as people feel confident, but ultimately it is demand that drives the market.

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