Skip to main content

Bonkers Economics - is it me, or is it the system that is crazy?

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:

  1. 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.
  2. 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.
  3. Finally, there's the question of mum and dad (or granny and granddad) wanting high house prices in order to pass on as much as possible to the next generation. Even here there's a massive flaw in the common logic. Because the high house prices that boost the value of the inheritance simply mean that the children or grandchildren will have to pay more (and therefore borrow more) than they would if house prices were lower. If a lower inheritance means that houses are cheaper, then the future generations are quids in!
The bottom line is that most money that goes into housing stays in housing through the generations, and higher prices just result in future generations paying more. At some point this crazy dynamic has got to break, and there are lost of ways that the government could bring down prices without causing a financial crash. There'll be a Bonkers Economics video soon about that, too.