Why is it seen as a good thing when house prices go up?

David Kingman questions the peculiar habit of viewing rising house prices as a sign of progressProperty prices

When goods go up in price, most people usually see it as a bad thing. After all, stores hold sales because people usually want to pay as little as possible for the things they have to buy; consumption taxes (such as VAT) are nearly always extremely controversial because they involve the government directly increasing the cost of living for the rest of society. Throughout history, rises in the cost of food have been associated with famines and political instability, such as the “Bread Riots” of 1977 in Egypt, or even the French Revolution.

However, there appears to be one great exception to the general rule that rising prices are seen as a bad thing: housing. Two news stories last week brought the contrast between housing and other categories of goods into stark relief, in a way which calls into question why exactly rising house prices are seen as such good news.

House prices and train tickets

On 13 August the BBC reported that house price inflation reached 3.1% in the year up to June, an increase on the 2.9% recorded a month before. The Royal Institution of Chartered Surveyors said this was the fastest pace of increase recorded since 2006.

This piece of news was widely heralded as a sign of progress, the latest indicator that Britain’s economy was on the mend. The Daily Mail endorsed the news with a headline that began “Britain is Booming! House prices up £10,000 in a year…”, while the first line of the article beneath read: “a stream of good news for the economy yesterday gave hope that Britain is finally emerging from the downturn.”

The Financial Times also treated this as good news, saying A raft of positive data this week has reinforced a sense of recovery in the UK housing market…”, while the Express led with Booming Britain: Joy for millions as house prices rise six months in a row”. A recent article about the health of the British economy in The Economist claimed that rising house prices were one of the few signs of progress amid an outlook that still looks pretty bleak otherwise.

What made this reaction so remarkable was that on the same day, it was also announced that rail fares are set to rise by an average of 4.1% in England next year. Additional increases could mean that some customers see an increase of over 9% in total. This news was greeted, almost unanimously, with howls of outrage. Groups which campaign on behalf of transport users, including the Campaign for Better Transport and Passenger Focus, were quick to register their disapproval, as were the labour unions representing the train workers. The Daily Telegraph and the Independent were just two of the news organisations who reported on this story in a negative light.

Spot the contradiction? These two different news stories, both appearing on the same day, were essentially both about increases in different types of inflation. Yet, according to much of the media and the general tone of public debate, one type of inflation is good for society and the other is bad. So why should this be the case?

Buyers vs Sellers

The obvious distinction at play here is that the media usually positions itself on the side of the consumer when it reports on rising prices – as in the case of transport – for whom they are clearly a bad thing. However, it seems that when in comes to house prices, certain sections of the media are broadly on the side of property owners, who want (or need) their property to go on rising in value as much as possible.

In reality, there are two sides to every story: people who dream of owning their own property but can’t afford to are the winners when prices start to fall, so their wishes are exactly the opposite of the property owners’. In a way, this simply reflects the tension which always exists between buyers and sellers in any transaction. There are always plenty of victims when the price of anything goes down, whose plight is often unacknowledged – from the small farmers who lose out so that supermarkets can provide us with food that is extremely cheap by historical standards, to the sweatshop workers who enable us to wear cheap clothing.

Nevertheless, there are also lessons to be learned from this trend about our economy. Among the dissenting voices who tried to question whether rising house prices are really such good news was Merryn Somerset Webb, the editor-in-chief of Money Week, who told the BBC: “I tend to think rising house prices are terrible news… It’s an entirely unproductive part of the economy.”

One of the fundamental problems with the British economy is that we have become over-reliant on property, turning the roofs over our heads into our biggest stores of wealth and source of financial security. As Merryn Somerset Webb argued, this is bad because property investment is less productive than if the same money had been invested in companies via the stock market, or used to set up small business.

It has also led to a situation where millions of people need property prices to go on rising, simply because their house represents their most significant asset – either they are relying on it to act as their pension or to pay for their care in old age, or they had to borrow so much money to buy it in the first place that a fall into the dreaded negative equity could be ruinous.

Many commentators have spotted a degree of political calculation in George Osborne’s plan to effectively prop up high house prices by having the government absorb some of the risk of lending to new purchasers through the two-phase “Help to Buy” scheme. The way in which rising house prices are covered seems to suggest that newspaper editors also think there is more to be gained from trying to appeal to property owners rather than those who can’t afford to get on the ladder.

This is unfortunate for the millions of young people who need prices to fall if they are ever going to enjoy the benefits of property ownership themselves. Until the politicians and media start taking more of an interest in them, their side of the argument likely to go unheard.

Posted on: 24 August, 2013

4 thoughts on “Why is it seen as a good thing when house prices go up?

  1. Housing Market Reform

    The contradiction results because there is almost universal cultural acceptance of the concept of house price inflation as a desirable and effective means to increasing personal wealth.

    The challenge is to encourage homeowners to think more deeply about the consequences and unsustainable nature of house price inflation, both individually and collectively.

    On an individual level, rising prices make any subsequent house purchase more difficult, not more affordable. Equity withdrawal does not increase wealth and only increases indebtedness. Downsizing will rarely deliver the anticipated returns and meaningful equity release only occurs when moving into care or through inheritance. Is that eventual payoff really worth a lifetime’s struggle against rising prices? Of course multiple home ownership is different and can generate significant wealth.

    Collectively, an economy based on house price inflation is destined to collapse under the debt burden required to fund such house price growth and the subsequent misallocation of capital. Such problems manifest over the long term but a generation are now beginning to appreciate the unsustainable nature of house price inflation as their children become disadvantaged.

    The need is for residential housing to become for the purpose of providing accommodation and no longer to be a source of speculation and profit seeking. The solution is to remove the incentive to seek capital gain from residential property. But this brings us full circle to the expectation of tax free windfalls from house price inflation.

  2. conallboyle

    Of course rising ‘house’ prices is terrible news for many. But it’s even worse than that. It’s not HOUSE prices that rise (how could a man-made artifact do so?), it’s LAND prices that are shooting up!!

    Don’t believe it? Why does a 3-bed modern terrace cost £180k here in Wales, yet £380k in a mid-range London suburb. It’s LAND values, value created by Society.

    There’s agitation, and rightly so, to reform Stamp Duty, a nasty tax if ever there was. How about replacing it with a tiny 0.3 % Land Value Tax?

  3. TheMessiah

    Economic reality is about to collide with the socialist dream. Our out of touch political elite will stop at nothing to impose the Keynesian economic fallacy and the worship of the state.

    All young persons employed within the private sector should withdraw themselves from the market – We are not willing to be the tax slaves of the state. Our future is being stolen before our very eyes.

    Every year the Chinese become richer.
    Every year we become poorer.

    The intergenerational transfer imposed on us by the welfare state must end.

    We, the young, are John Galt.

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