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Martin Wolf - Chief Economics writer of FT headed up a full page on HPC. In my view they have called the tipping point.

I shall try and up load the scanned page. Dynamite and entirely brilliant.

See attachment



Edited by Financial Planner

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Martin Wolf: Dangers of the housing market delusion

By Martin Wolf

Published: April 17 2006 03:00 | Last updated: April 17 2006 03:00

Do higher house prices make a country richer? The answer is simply "no". If the market value of the stock is raised, those who own it are made better off by as much as those who will buy their houses from them are made worse off. Higher prices merely redistribute income among residents, principally from the young to the old.

So why do fast-growing economies tend to have soaring house prices and slow-growing ones the opposite? The answer is not that higher house prices make a country richer, but the opposite: the wealthier the country, the more expensive its housing.

Of the nine countries in the charts below, seven enjoyed relatively strong rises in real house prices over the past decade. But in two key cases - Germany and Japan - prices fell.

It is no surprise that the laggards have also been two of the worst performing high-income economies over this period, while Australia, France, Ireland, New Zealand, Spain, the UK and the US have shown better economic performance.

Why then should faster-growing economies experience strong rises in the price of housing?

Scarce land increases in value as economic activity rises. More important, richer people spend more on better located housing. Disproportionate increases in prices are needed to ration the slowly adjusting supply in response to higher demand. Planning restrictions may even halt the adjustment in supply.

Income is not the sole fundamental determinant of prices, however. Also important is the rise in the number of households. As people live longer, smaller households become more common and immigrants flood the labour market.

Improvements in supply of credit and reductions in nominal and real interest rates also raise demand: the former because they make it easier to borrow; the latter because they raise the prices of all real assets.

Declining economic instability can also justify more borrowing. The impact of lower real interest rates is ambiguous, however: in themselves, they raise asset prices, but to the extent that they suggest poor prospects for economic growth, they lower them.

Cyclical factors may also be at work. Real interest rates may prove unsustainably low: if so, a crash may follow soaring house prices.

A risk also exists of self-sustaining upward (and on the opposite side of the cycle, downward) spirals: higher house prices lead to more borrowing and spending, faster economic expansion, still higher house prices, and so forth. When prices fall, however, declining housing equity, shrinking borrowing and spending and widespread defaults may generate a contraction in economic activity and in house prices.

A big question therefore is whether house prices have overshot equilibrium levels. In its December 2005 Economic Outlook, the Organisation for Economic Co-operation and Development said prices were overvalued in Ireland, Spain and the UK, but not elsewhere. Yet British economists writing in the FT deny this of the latter (Gavin Cameron, John Muellbauer, Anthony Murphy, "Housing pessimists are wrong but have their uses", March 27, 2006).

Where prices have risen far faster than underlying incomes, only two possibilities exist.

Either prices have moved to a higher equilibrium level, in which case future purchasers will have to save more and consume less. That would itself have significant economic implications. Or they have reached an unsustainable level, in which case they will fall in real terms. That would have far more significant economic implications.

The future will tell us which and where - possibly quite soon.

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  • 302 Brexit, House prices and Summer 2020

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