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House prices: a vicious or virtuous cycle?

By Ian Cowie, Personal Finance Editor

Last Updated: 4:22pm GMT 08/03/2007

House prices rise

Most people's homes earned more than their owners did last month.

The average house price jumped by £3,407 during February, according to Halifax, Britain's biggest mortgage lender. That's nearly £122 per day or equivalent to more than £40,000 a year, tax-free. By contrast, the average wage is less than £24,000 gross.

advertisementSuch effortless wealth accumulation is, of course, highly agreeable for homeowners and utterly depressing for anyone who has not yet bought but hopes to do so in future.

Wiseacres who say these gains are illusory have presumably never heard of equity release or noticed how the British love affair with bricks and mortar has spilled over into a second-home property boom in Spain, France and wherever you can reach reliable sunshine on cheap flights.

Back in the overcrowded British Isles, the iron law of supply and demand has made fools of the house price pessimists once again.

Only about 160,000 homes were built in England last year while the number of households is thought to have increased by 200,000. Part of this is caused by the trend toward more people living alone.

Then there is immigration, with the influx of wealthy Russians in London providing the latest boost to the top end of the housing market.

When rising demand meets fixed supply - and they ain't making land anymore - prices go up. The big question for owners and would-be owners alike is: can it last?

A combination of high prices, relatively low mortgage costs - and the Bank of England left base rate unchanged in its announcement today - have encouraged first-time buyers to stretch ever further to get onto the property ladder.

Lenders have relaxed terms and conditions, advancing up to five times borrowers' incomes and allowing repayment periods to lengthen to half a century, importing the idea of deathbed mortgages from Japan and Switzerland.

Is this a vicious or a virtuous cycle? Once again, it depends entirely on your point of view. Homeowners - many of whom now say they see their property as their pension - are only too happy to watch easy credit and desperate borrowers chase up the price of their biggest asset. Anyone who does not own property feels doubly disenfranchised as prices soar out of reach.

But both groups should beware that no market moves in a straight line forever. A trend is only a trend until it stops. While mortgage costs today are less than half the 15pc rate which precipitated the last property crash, we have seen three small increases since last summer and most analysts expect more to come.

Unemployment, at 5.5pc of the workforce, is also little more than half the level it plumbed during the depths of the house price slump in the early 1990s.

A sharp increase in either interest rates or unemployment could burst the house price bubble. If both jumped as they did 17 years ago the effect would be shocking. But there is no reason to expect either event any time soon.

For now, while the housing market reaches giddy heights, it seems to be built on solid foundations; demand exceeds supply.

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House prices: a vicious or virtuous cycle?

By Ian Cowie, Personal Finance Editor

Last Updated: 4:22pm GMT 08/03/2007

House prices rise

Most people's homes earned more than their owners did last month.

The average house price jumped by £3,407 during February, according to Halifax, Britain's biggest mortgage lender. That's nearly £122 per day or equivalent to more than £40,000 a year, tax-free. By contrast, the average wage is less than £24,000 gross.

advertisementSuch effortless wealth accumulation is, of course, highly agreeable for homeowners and utterly depressing for anyone who has not yet bought but hopes to do so in future.

Wiseacres who say these gains are illusory have presumably never heard of equity release or noticed how the British love affair with bricks and mortar has spilled over into a second-home property boom in Spain, France and wherever you can reach reliable sunshine on cheap flights.

Back in the overcrowded British Isles, the iron law of supply and demand has made fools of the house price pessimists once again.

Only about 160,000 homes were built in England last year while the number of households is thought to have increased by 200,000. Part of this is caused by the trend toward more people living alone.

Then there is immigration, with the influx of wealthy Russians in London providing the latest boost to the top end of the housing market.

When rising demand meets fixed supply - and they ain't making land anymore - prices go up. The big question for owners and would-be owners alike is: can it last?

A combination of high prices, relatively low mortgage costs - and the Bank of England left base rate unchanged in its announcement today - have encouraged first-time buyers to stretch ever further to get onto the property ladder.

Lenders have relaxed terms and conditions, advancing up to five times borrowers' incomes and allowing repayment periods to lengthen to half a century, importing the idea of deathbed mortgages from Japan and Switzerland.

Is this a vicious or a virtuous cycle? Once again, it depends entirely on your point of view. Homeowners - many of whom now say they see their property as their pension - are only too happy to watch easy credit and desperate borrowers chase up the price of their biggest asset. Anyone who does not own property feels doubly disenfranchised as prices soar out of reach.

But both groups should beware that no market moves in a straight line forever. A trend is only a trend until it stops. While mortgage costs today are less than half the 15pc rate which precipitated the last property crash, we have seen three small increases since last summer and most analysts expect more to come.

Unemployment, at 5.5pc of the workforce, is also little more than half the level it plumbed during the depths of the house price slump in the early 1990s.

A sharp increase in either interest rates or unemployment could burst the house price bubble. If both jumped as they did 17 years ago the effect would be shocking. But there is no reason to expect either event any time soon.

For now, while the housing market reaches giddy heights, it seems to be built on solid foundations; demand exceeds supply.

Typical VI statement that demand exceeds supply plus everthing is wonderful in the miracle economy.

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Back in the overcrowded British Isles, the iron law of supply and demand has made fools of the house price pessimists once again.

The arrogance of these people. If there is ever a revolution in this country there won't be enough lampposts.

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Wiseacres who say these gains are illusory have presumably never heard of equity release or noticed how the British love affair with bricks and mortar has spilled over into a second-home property boom in Spain, France and wherever you can reach reliable sunshine on cheap flights.

This is true, and contradicts what is often stated by posters on this forum.

If someone bought a few years ago, they can sell and rent and be £100k better off than I am. That is a real gain.

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Remember when an economist says "demand" he means something different from the rest of us. Demand in economics means demand with money behind it. No demand doesn't mean no one wants one, it means no one wants to pay that amount for one.

(I did first year economics, can you tell?)

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