Why I hate high house prices

by Cliff D'Arcy on 08 September 2009  |  49 comments
Tweet

How were we duped into believing rising property prices are always a good thing? Here are seven reasons to hate high house prices...

House prices have risen yet again, according to Nationwide, which reported a rise of 0.1% in June, taking the growth in house prices so far this year to 3%.

However, the end may be in sight. The annual rate of house price inflation has fallen for the second straight month - in other words, house prices were increasing at a faster rate this time last year.

The signs are beginning to point to at least a stagnation in prices, if not falls around the corner.

This is good news - I firmly believe that high and rising house prices are bad for Britain as a whole. Here are seven reasons to hate high house prices:

Why high houses prices are bad for Britain

1.)     Bad for businesses

By 2007, too much of the UK's wealth was invested in property. At the peak, the Halifax estimated that domestic housing was worth a total of £5 trillion. Now imagine that, instead of being invested in bricks and mortar, a fraction of this sum was used to create businesses, providing jobs and selling goods and services. Which would benefit the UK more -- business creation or property speculation?

Also, as we spend an increasingly large proportion of our take-home pay servicing mortgage payments, so we have less to spend in the shops. Again, this reduces corporate profitability and restricts the UK's growth.

Related goal

Sell your home

If you want to obtain the best possible price when selling your home, then these ideas should help.

Do this goal

2.)     Bad for first-time buyers

Let's say that you're a young adult earning, say, £25,000 a year (the average national salary in 2008, according to the Office of National Statistics). A mortgage lender will lend you four times your salary, or £100,000. Let's imagine, by scrimping and saving, you amass a deposit of £10,000. Thus, you can afford a property worth £110,000 -- or about £60,000 less than the average UK property price, according to Nationwide.

So, today's high house prices currently exclude homebuyers earning average salaries from taking their first step onto the property ladder, forcing them to live with their parents or rent while the market runs away from them.

3.)     Bad for labour mobility

High house prices are also bad for the UK's workforce. In particular, 'housing hotspots' prevent many career workers from living close to their place of work. This forces workers to commute long distances, leading to millions more unproductive hours on the road -- and more greenhouse gases.

4.)     Bad for rural, coastal and tourist areas

Last year I had a lovely fortnight in north Cornwall. What was incredible to me was that, in the town where I stayed, modest family homes and flats were on offer for £500,000+. Given that the average local wage is perhaps £20,000, this means that these starter homes cost around 25 times earnings. In other words, there's no chance of a local person being able to buy locally.

To me, this is a tragedy, as it forces young people to move away from their birth place, seen off by second-home owners.

5.)     Bad for saving (but good for borrowing)

During the boom years of 1995 to 2007, house prices almost tripled. So too did mortgage borrowing, as banks rushed to lend to any buyer with a pulse.

This new-found wealth led to a boom in mortgage equity withdrawal -- aka MEWing -- where homeowners borrowed against rising property values in order to splurge elsewhere.

In other words, high house prices produce a 'wealth affect' which encourages us to borrow more. It also put us puts off saving. Indeed, as I warned in How saving hurts house prices, when house prices rise, the savings ratio falls.

Given the events of the past few years, I would argue that the UK needs more sensible savers, not the return of reckless borrowers!

6.)     Bad for a large slice of society

Related blog post

• John Fitzsimons writes:

  Is now a good time to buy for first-time buyers?

  The Stamp Duty threshold may have been raised to £250,000, but are the conditions right for first-time buyers to get onto the property ladder?

  Read this post

The higher house prices rise, the more out of reach they become to an ever-larger slice of the working population.

At present, roughly seven in ten homes (69%) are owner-occupied. I suspect that the majority of the remaining 30% of the population would love to buy, but are prevented from doing so thanks to a low or unreliable income, job insecurity, health problems and so on. Nevertheless, here in the UK, we look down on tenants as though they were in some way inferior beings.

Indeed, people are amazed to discover that I sold my house five years ago and have yet to buy another!

7.)     Inflation is always bad for your wealth

Recent question on this topic

• b0ng0 asks:

  Looking for a joint mortgage with my fiance who is from China (working here permanently) - who would give the best deal?

  • 
    SoftwareBear answered "I'm surprised you can get a joint mortgage with a two year visa...."
  • 
    b0ng0 answered "I was kind of suprised too. I believe HSBC don't even mind about the length of your visa if you..."
  • Read more answers

Rising house prices are just another form of inflation. We complain when the prices of food, fuel and other essential purchase rise, but cheer when house prices go the same way. Frankly, this is madness for the majority -- unless you're a property investor, or plan to sell and not buy again, of course.

In summary, another property boom and bust would be disastrous for the UK -- but I don't expect the recent trend of rising prices to continue. Don't get your hopes up, as we're not at the bottom yet. A twelve-year borrowing binge needs a much nastier hangover than what we've suffered so far.

In fact, in the last crash, it took nine years for house prices to return to their 1989 peak, so I think we've a long, long way to go yet...

This is a lovemoney.com classic article, originally published in September 2009 and updated

More: Why you're better off with a tracker mortgage | Beware anyone selling property this year

At lovemoney.com, you can research all the best deals yourself using our online mortgage service, or speak directly to a whole-of-market, fee-free lovemoney.com broker. Call 0800 804 4045 or email mortgages@lovemoney.com for more help.