This week sees the launch of my new video series, Bonkers Economics. First up, I'm asking why we're all so addicted to rising house prices. I say addicted because rising house prices really are that harmful, even for homeowners, as the video explains.
The video lasts nine minutes and can be found here. For those who prefer reading or would like a quick synopsis or recap, the key points are as follows:
- Rents follow house prices: If you own a house but other people in your family - for example your children - are paying rent, then watching the value of your house increase is an expensive entertainment when you consider your family as a whole. Because an increase in value that you're not likely to cash in any time soon is costing your family collectively real money, right now, because rents are so high.
- For those just clambering on to the housing ladder, the rising price of their first home is going to cost them real money going forward. That's because first-time-buyers generally plan to trade up when they can. The following example explains this.
- If the first house costs £200,000 and the second, a few years later, is £360,000, that's another £160,000 they'll need to find. If prices rise 25% in those few years (which they easily might) then the first house will sell for £250,000 but the second will cost £450,000 - an extra £200,000. But if prices fall 25% in those few years, then the first house will only sell for £150,000, but the second one will be £270,000, so the extra will only be £120,000.
- Of course this throws up an issue of negative equity - the mortgage on the first house being more than it sells for. As things are currently organised, that makes it difficult to move house at all. But things can be organised differently, and this is actually a problem that a willing government could easily fix in the interests of making housing more affordable. This will be the subject of the next Bonkers Economics video in few weeks' time.