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The wrong kind of house price falls

Inside Politics – The Policy Exchange newsletter (London), 11 April 2008

This week’s headlines were dominated by news from the housing market – again. Until last summer house prices seemed to know only one direction as the property market went from strength to strength. But then the Halifax announced a record fall in March. Prices dropped by only 2.5%, but after a decade of rises that gave homeowners an overall increase of well over 180 per cent, such a change was substantial.

In a way, the Prime Minister was right when he maintained this week that the current fall was ‘containable’. However, the reaction to it clearly was not. Mortgage deals have kept disappearing from the market (Abbey was the last lender to stop offering 100 per cent deals). Sterling has come under intense pressure, with the pound slipping below 80 pence to the Euro for the first time. UK consumer confidence has also hit rock-bottom. Add to this a depressing forecast for UK economic growth from the International Monetary Fund and what you get is a gloomy outlook for the British economy.

We may all be facing turbulent times ahead in which the instability of the housing market spreads to the wider economy. Does this remind you of something? In July 1997, there was an aspiring Chancellor of the Exchequer who, in his first budget speech, said: “I am determined that as a country we never return to the instability, speculation, and negative equity that characterised the housing market in the 1980s and 1990s. Volatility is damaging both to the housing market and to the economy as a whole. … I will not allow house prices to get out of control.”

That Chancellor, now our Prime Minister, assured us this week “that we can get the housing market to continue to move forward”. In other words, where Gordon Brown once saw the dangers of continued house price inflation, he now fears the very opposite. But as he failed to stop house prices getting out of control, why should anyone believe him now?

Furthermore, today’s decline in house prices will not make housing more affordable. As Policy Exchange author Dr Tim Leunig correctly pointed out in the FT, current falls are the result of reduced credit, not better supply. In this sense, we are now in the worst of all worlds: falling house prices damaging the economy, with housing affordability an even bigger problem than before.

The Prime Minister’s reaction to the news from the housing front was as hapless as it was helpless. But given his record dealing with the housing market when he was Chancellor you wouldn’t have expected anything else.

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