Having just given HousePriceCrash a plug, it would be churlish of me not to mention that the Royal Institute for Chartered Surveyors are predicting a little price boom at the moment. The story can be followed on Reuters and the Daily Express website (the latter I understand is claiming prices will boom by 50% over the next six years).
Surely HPC and RICS can’t both be right? Worryingly, they could be, but we’d better hope that HPC is closer.
Despite the rosy coverage in both Reuters and the Daily Express, a rise in house prices essentially means that demand is outstripping supply. Yes, your economics A-level was right – unlike the magical fairy land where Express journalists live, prices go up and down depending on how much there is of a thing and how many people want it.
What your economics A-level might not have explained very well (mine certainly didn’t) was that if demand is perceived to be outstripping supply, price can escalate even higher as people ramp up prices in an attempt to cash in. People will tend to stockpile – sit on perfectly good housing believing that if they delay their sale, they will make a killing. And in turn, people will buy at escalated prices on the assumption that they will be able to sell on for even more. It’s called a bubble.
The problem is, the invisible hand of the market is such that sooner or later it will drag the price down – hence that rather mountainous looking graph on the front of HPC. If you stay ahead of the curve, you stand to make a fortune. If you stay in the market too long, you’ll get burned.
And if you’re a young adult trying to buy a first home? You’re utterly screwed.
The good news for property owners is however that unlike 17th century tulips, late 20th century dot-com shares and, periodically, American comics (I worked in a comic shop in the early 90s when the comics industry went through a little bubble of its own), in the long term housing tends to keep its value. That isn’t to say it doesn’t peak and trough, but the other thing to notice about the graph on the HPC website is that the overall trend is an increase. That’s because people always need land and there is only a finite amount of it to go round. Land is not capital, and it behaves differently.
The implications for this explain why I said on Saturday that I didn’t think PricedOut goes far enough. The government can’t simply legislate itself more homes if the market knows it is onto a winner with the number of homes currently being built; if we attempt to build more homes than the market wants, then developers will simply put the breaks on, as they have been doing for the past 20 years. Raising interest rates will probably cool down the market, but the potential gains are still huge – speculative pressure will remain.
The problem, I suggest, is the market itself, and specifically the fact that it treats land just like any other commodity, despite the fact that it is sui generis. But I will continue this another time as it’s getting late.