Falling House Prices

The apparently alarming news from the Halifax that in September house prices took a record fall of  3.6%, is in fact a very good thing. While everyone argues about cuts in the part of the economy under the control of politicians, the state sector, there is a real economy rebuilding and reshaping at the behest of the ordinary people. Manufacturing is showing its sharpest rise in fifteen years and consumer debt is falling. Affordable housing is central to everything and the use of inflating property prices as the engine of western economies is the root of all that has gone wrong.

Add to this irresponsible lending to people so that they could buy at prices they could not really afford and you have a disaster. New FSA rules are stopping the irresponsible lending and will force house prices down to the level people can safely finance. A cap on housing benefit will drive down rents. That will drive down prices as well. Houses are no different in this respect to any other commodity.

The elephant in the room which nobody, least of all any politician, is willing to look at, is that most personal wealth is founded on property and is, in fact, an illusion. It can be argued that property is still valued at double its true worth. If that were so, those with a fifty per cent mortgage have no equity and those with higher loans are, unless there are other assets at their disposal, insolvent. Moreover the banks are, and will remain, more at risk than we believe. Certainly they must lend to small business and industry, but they must be very prudent on property lending . Very prudent indeed.

Getting this economy back on track is a much bigger challenge than most people realize.