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House of horrors

Created:
13 May 2008
Written by:
Jonathan Eley

If you happen to be having a dinner party tonight, the issue of house prices could feasibly keep you in conversation until the coffee and petits fours are served. Today has seen several pieces of news that, on the face of it, are horrible for house prices. But you could surprise your dinner guests by affecting an air of detached nonchalance about the significance of all this. Allow me to explain...

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First, the bad news. In no particular order:

■ Surveyors are bearish: the Royal Institue of Chartered Surveyors said its house price balance dropped for the ninth month in succession. A record 95.1 percent more Chartered Surveyors reported a fall than a rise in house prices, an increase from 79.4 percent in March. The regional picture is even more depressed with surveyors in East Anglia, the North and North West unanimous that house prices are falling. The net balance in Scotland turned negative, where previously it was the only UK region where the majority of surveyors were reporting house price increases. (Read the full release here)

■ Housebuilders are feeling the pinch: Today, Redrow and Galliford Try warned on tough market conditions. Redrow said "the trading environment has deteriorated to an even greater extent than we had anticipated at the time of our interim results announcement."

■ Inflation data suggests interest rates will stay high. Prices at the factory gate are rising rapidly as manufacturers pass on increases in the price of raw materials to consumers. It's reckoned that this will keep consumer price inflation above target - and prompt the Bank of England to keep interest rates high to rein inflation back.

The finger of blame for all this is generally pointed at 'the credit crunch' or 'the sub-prime' crisis. And it's certainly true that mortgage availability has shrunk considerably, thanks to banks' new-found risk aversion. But it's not the only reason.

In the populist press, the mantra that house prices are falling, and could well crash, is repeated daily. Every piece of remotely negative news is pounced on. News bulletins regularly unearth weepy couples who are facing repossession or struggling to juggle their debts. It all makes for great headlines.

Except that it's not really representative of what's going on - which is that anyone with an average mortgage is still repaying it and getting on with life as usual. Most UK citizens are not lying awake every night worrying about what their houses are worth.

There's a good reason for this. For most folks, houses aren't wealth. They're just places where we live, and we accept that they cost money, just like cars, or food, or electricity. For more on this fundamental argument, see Willem Buiter's blog on FT.com (Buiter is a former member of the Bank of England's Monetary Policy Committee, so he should know).

Furthermore, despite all the hand-wringing in the popular press, as a nation we are not over-indebted. The Bank of England's monthly money supply figures aren't an entertaining read, but the data within them tells us that households have £1.4trillion of debt (that includes mortgages and consumer debt). Personal income after tax last year totalled £866bn. That means that, on average, we owe just 1.6 times our annual take-home pay. As a nation, the number of people who are mortgaged to the hilt is cancelled out many times over by those who are mortgage free or moderately indebted. On top of that, we have £957bn in the bank as savings (see March bankstats).

And as our economics writer Chris Dillow recently pointed out, there's precious little correlation between house prices and the stock market. So unless you're trying to sell your house, find something else to worry about.

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