Tag Archives: house_prices

Boom and bust

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.

Labour: young people are feckless. Lib Dems: no, they’re just dumb.

Labour and Lib Dem spokespeople have been competing on how best to insult young people struggling to pay for their own pensions this week.

Speaking at an Institute of Public Policy Research meeting, Pensions Minister James Purnell highlighted the fact that the number of young people saving for a pension has gone down in the past five years from 1-in-3 to 1-in-4. His explanation is simple:

“At the moment, young people are acting as if they expect to be able to fund a longer and longer retirement with less and less saving.”

Meanwhile Lib Dem Shadow Chancellor Vince Cable has been highlighting the huge levels of credit that young people are currently taking out:

“This research highlights the fact that there is a pressing need to help the young when it comes to financial understanding.

“All the signs point to a huge shift in the financial knowledge of young people now compared with their parents.

“The Government’s university tuition fees, high house prices and the aggressive marketing of credit are all contributing factors.

“Although there is some financial education and help for people when they are in difficulty, the focus should be on tackling this problem before it occurs.

“There should be a genuinely independent financial advice network to help people before financial hardship takes hold.”

To be fair on Vince, he does at least refer to contributing factors such as house prices and graduate debt, but he doesn’t propose doing anything about them – he magic bullet is simple more education. James Purnell doesn’t even go that far. His explanation are “Three Cs” – confidence, complexity and culture. All three may well be true, but that is to pretend that pensions are wholly divorced from everything else.

The reason a “live fast, die poor” culture has emerged is that credit and depending on parents is the norm for young people these days; it’s how you get on in life. Lecturing people about depending on too much credit is a little rich in a country where it is government policy to have every young person in hundreds of thousands of pounds of debt before they hit thirty.

And are we really expected to believe that the previous generation were any more careful with money than we are? Last time I looked, they spent their youth on drugs shagging anything that moved. The generation before, that grew up in the 1920s and lived through World War Two, certainly knew the meaning of saving for the future. I’ll take lectures from them, but not their profligate children.