Bursting the bubble

On a day when the Nationwide Building Society published figures showing that UK house prices fell by 2.5% in May, there has been some reflection in the media on whether this is a good or a bad thing. Larry Elliot’s column in the Guardian was a particularly welcome piece of common-sense; he recognises that the so-called “housing boom” has seen a massive shift in resources from the younger and poorer to the older and richer.

But, nagging away behind all this, there’s a much more fundamental question. Supposing that, in the longer term, there is a fundamental instability in house prices? After all, the story – in Britain at least – has been long term cycles of boom and bust, a market that is apparently incapable of settling into a stable equilibrium. Now there’s quite an interesting issue here of the psychology of the market, and the way in which it has been a vehicle for speculation. As this article by ABN AMRO bank suggests, the UK’s house price trends have been much more volatile than in the US, where the current credit crunch is supposed to have originated; it identifies speculation and willingness (and ability, supported by lax monetary policy) to service debt as important features in the UK, and argues that houses may be overvalued by as much as 50%.

Obsession with property is a peculiarly British condition.  Back in the late 1970’s – another boom-and-bust period – Harold Lever was arguing persuasively that this obsession was damaging the British economy.  But since then we have been increasingly suckered by the view that the market can do no wrong.

We’ve also seen the social and economic divisions it causes – the redistribution of wealth to the already wealthy, the fact that increasingly both parents in a family have to work full-time to pay the mortgage, the vulnerability of people who have to borrow increasingly large multiples of income to buy a house at all.

The question may be whether we are prepared to accept what looks in the long term to be a fundamental instability in the market for the most important commodity of all – indeed to accept regulatory “reforms” and tax regimes which offer incentives to speculate – in the name of cultivating this socially and economically divisive obsession.

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