I Want A House Price Crash!

Falling house prices are exactly what we need, according to this Fool.

Everybody talks as if falling house prices are a bad thing, nay, a national disaster. Rising house prices, the logic runs, are therefore a good thing. But the reverse is true.

Right now, falling house prices are exactly what we need. You know it, I know it.

House prices dropped a record 8.1% over the past 12 months, according to Nationwide, the biggest drop since it started collecting figures in 1991. Other reports suggest that the value of your home could drop by as much as 30% by 2010.

Everybody pretends this is terrible news, but quite frankly, it isn't.

I would argue that most of us are delighted at the thought, and rightly so.

The press, of course, is revelling in all the doom and gloom, but headline-hungry journalists aren't the only ones getting excited by the housing market collapse.

Hoping for the worst

Many of us, not just first-time buyers and rivals for Gordon Brown's job, actively want prices to fall. We would be disappointed if they stabilised, and the housing market became tediously becalmed.

The forthcoming collapse has been so widely predicted that if it doesn't happen, we would all be crushed by the anti-climax.

There is also a collective - and very sensible - horror at the way house prices have spiralled beyond all logic in recent years. We're all financial puritans at heart.

Even people who have cashed in to the tune of hundreds of thousands of pounds have been appalled by this scarcely credible surge in values. If house prices can behave so irrationally, how rational is the rest of our financial system?

The party's over

Add to that widespread distaste at the orgy of debt the UK has indulged in lately, and you can see why many people have been howling for the party to come to an end. It may leave many of us nursing sore heads and negative equity, but we knew all along it would end in tears.

So who gets hurt by a crash? Some will find it painful, but not as many as you think. Existing homeowners may see up to 30% lopped off the value of their home, but their next property has also fallen by 30%, so where's the problem?

Even the 1.7 million that Standard & Poor's estimate face negative equity will only suffer if they absolutely need to move home in the next few years. If you are among their number, you have my sympathy.

Other homeowners will have a shrinking amount of equity to dip into, too. But given that the nation collectively owes £1.4 trillion, the last thing we need is more borrowing.

In my opinion, those who missed out on the house price bonanza should be popping champagne corks. Or better still, saving the money towards a deposit, to allow them to enter the property market at more affordable levels in a year or two.

Any fall must be set in the context of the astronomical gains in recent years. As Nationwide quickly points out, the average house is still worth £11,000 more than three years ago - although admittedly, maybe not for much longer.

So let's not get too carried away, it's not the end of the world as we know it, just an abrupt halt to its wilder excesses.

Short, sharp shock

A short, sharp property crash might do us all some good - and I do believe it is likely to be short and sharp.

Although unemployment is set to rise, it still remains at modest levels. Personal insolvencies and repossessions will increase, but many people will hang on by the skin of their teeth until the recovery comes.

There are also one or two pieces of good news floating around, overlooked in the current carnage.

Swap rates are falling and lenders are cutting their fixed-rate mortgages, which might ease some of the pain for those facing payment shock. Plus there is still a good chance that interest rates could start falling by the end of the year.

Reality bites

Add the fact that we live on a small, squeezed island with a pent-up demand for houses, and you can see the ground is clear for a relatively speedy recovery. But let's hope it isn't too speedy, because we don't want to find ourselves repeating the blunders of the past decade (and the decade before that).

Arguably, the crash is a much-needed jolt of economic reality, and is the first step towards restoring common sense to the property market, and the rest of the economy.

I'll say it again. Falling house prices are a good thing. Enjoy it while it lasts.

More: The Truth About House Prices