The Analyst: The painful truth about land values

This week, I will be taking a close look at property. It is fair to say that I have not been a fan of property (whether commercial or residential) for many years. I find myself revisiting an article I wrote for a trade magazine back in September 2005, which was by and large reviewing a book called Boom Bust: House Prices, Banking and the Depression of 2010 by Fred Harrison.

I do not read many financial books (to be frank, I find them boring), but Harrison's book should be compulsory reading for the regulators and politicians of this country. It beautifully prophesied the problems we are experiencing now, and indeed Harrison's previous books also foretold the property crash of the early 1990s.

The continuing boom and bust cycles in property have plagued developed economies since records began. Harrison goes back to the birth of the first building societies in the 1700s; since then, the cycles have typically lasted 18 years. What is surprising is that the dismal science of economics meekly accepts that these busts are part of a natural cycle rather than attempting to find their causes. They are not unique to the UK, but happen in every developed economy.

Harrison finds that the problem of every property bust is land. Land is very different from labour or capital markets (as Mark Twain once said, "they don't make it anymore"), yet information about its value is remarkably scarce. By contrast, any data regarding property prices is scrutinised in minute detail. In a market for consumer goods, if prices rise, supply will increase, and this extra supply leads to prices falling back to their competitive levels. This cannot be the case with land; in effect it has been written out of economic textbooks.

The public is often completely misled and, as Harrison puts it, "the tragedy of house prices is trends that are eclipsing people's ability to afford shelter for their families". He suggests (rightly, in my view) that rather than enriching many people, property has actually impoverished far more. What is more, it is all completely unnecessary.

Rises in property prices can be really dangerous, as we are seeing now. Yet how do our financial institutions react to house prices going up? They actually make it easier for people to get into massive debt and help drive prices even higher. This borrowing binge has now been going on across the world for over a decade. Those who (whether through judgement or blind luck) time their entrance and exit perfectly can make a fortune, but the result for most people is families losing their homes during the tough times. Times will be tougher in 2009 than many of us have ever seen.

Harrison condemned both Alan Greenspan and Gordon Brown for not insisting on better information about land markets. He went on to suggest that their policies aggravated the situation to the point that, instead of modest national recessions, we might have to endure a huge global recession.

I think he was right about that. Why can't something be done? The problem is that those with an ability to change the rules of the game benefit from the current system that it is convenient for them to maintain the status quo.

Boom Bust should be compulsory reading for all those in the Treasury and particularly Gordon Brown. I'm staggered that he is now being fêted as a saviour of the financial system – he is one of the main architects of its downfall.

With the housing market expected to fall at least another 15 per cent over 2009, about a quarter of the population will have a house price lower than when they purchased. When will politicians (and indeed many so-called economic experts) appreciate that the problem is not supply and demand of housing, but the monopoly of land? Property has only been a road to riches for a minority and now it is going to cause a major headache for the majority.

Mark Dampier is the head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more information about the funds included in this column, visit www.h-l.co.uk/independent