House Prices

In the UK Prime Minister Gordon Brown is interviewed on TV about the bad news that reports show that house prices are falling. In the same news broadcast people are interviewed in the street about about how they will be affected by having less money to spend because of the recession. Not for the first time the media seems to have decided what is good and what is bad, but I would query their assessment of the current situation. The government has just announced the lowest unemployment figures for thirty years, inflation is between 2 and 3%, and average salaries are a little ahead of inflation; so why exactly should the average person feel they have less to spend? When prices fluctuate then there are always winners and losers: falling house prices are good for first time buyers and bad for those sellers who are not also buying another property. House owners who want to sell so they can buy a better house are also better off if house prices fall, as the house they want to buy should come down by proportionally more than the house they are selling. For those of us not planning to sell, the value of their house is largely irrelevant. I would contend that falling house prices is either good news, or of no real consequence for most people.

More importantly, house prices have to come down if Britain is ever going to solve its housing shortage. Prices are governed by supply and demand, and the reason that Britain has some of the highest house prices in the world is that demand invariably exceeds supply. This government (and previous governments) have announced their intention to build more houses, and if we ever achieve equality of supply and demand then prices will inevitably come down. The news media generally view things from the consumers point of view, so in general prices increases on the high street are considered bad news, so why do they think house price increases are a good thing?