The Big Question: Are rising house prices good or bad news for the economy?

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How much are they rising?

House prices have doubled in the last four years. The cost of the average home in England has now crashed through the £200,000 barrier. That means its price has risen by £3,000 a month - or £100 a day - since the first half of 2002.

It's not just England, the average house price throughout Britain has risen to £194,454, according to figures just published by the Government. In Wales, the average price is £156,205, in Scotland its is £140,460 and in Northern Ireland the figure has risen to an all-time high of £158,104.

And it's not just that prices have risen - they have risen at their fastest rate for 14 months. The rate of increase has fluctuated significantly in the past four years. In 2003, they rose at a rate of 20 per cent. By contrast last summer they had flattened out completely. Now they are on the rise again, and rapidly.

Why are they rising?

Two things govern house prices. The first is supply and demand. As a nation we do not build enough houses to keep pace with a growing population. Since 1982 the population has steadily increased. Rising divorce rates have created a need for more single-person homes. Immigration is rising, by 74,000 last year. Growth in the population of the UK accelerated in the year to mid-2005 to its fastest rate since the 1960s, taking the total population above 60 million for the first time.

The second driver of house price inflation is confidence. The expectation that prices will rise pushes prices up. This price-rise then reinforces the feeling that prices will continue to rise. It is a self-fulfilling prophecy. It takes some external shock - a recession, a rise in unemployment, a stockmarket crash, a natural disaster or a war - to smash this confidence and cause prices to fall. The strong growth in house prices over the past few decades has created high levels of confidence.

Who benefits?

The 70 per cent of the nation who are homeowners. They benefit psychologically from the feeling that they have built up, in their bricks and mortar, a store of value which previous generations would have regarded as huge wealth. There are costs to home-owning - in maintenance, heating, the payment of council tax and so on. The bigger the house the more you have to spend on it. But the more it is worth.

They benefit too from the ability to realise the capital in their house. They can - and in retirement often do - downsize to a smaller house and use the money realised to fund a more comfortable old age. Or they can stay in the home and raise cash through an equity release scheme.

Who loses?

Three groups. The 30 per cent of the population who don't own a house. The young. And those who overstretch themselves with a mortgage that is too big.

Those too poor to own a house rent, either privately or from their local council or housing association. They find it much harder to move house than homeowners do. As house prices rise, they find it increasingly difficult to extricate themselves from this poverty trap and climb onto the first rung of the property ladder. Since house prices are rising faster than wages they find it ever harder to climb from the trap.

Young people find it increasingly difficult to get their first foot on the ladder too. Those who are taking on their first property mortgages are stretching themselves more and more to take out that first loan. The average price paid for a first home was up by 5.6 per cent in a year to just over £150,000. Young buyers are being forced to take out mega-mortgages. The Council of Mortgage Lenders report that first-time buyers are now borrowing an average of 3.21 times their salary. In London, where the average house price is £285,434 people are borrowing five or six times their salary. These are the highest income/loan ratios ever.

Such buyers are extremely vulnerable to financial shocks - such as interest rate rises, illness or redundancy. A Citizens Advice report suggests that hundreds of thousands of Britons are now struggling to make their mortgage repayments. The number of homes repossessed rose dramatically by 72 per cent in the first six months of this year. Personal bankruptcies were up 32 per cent in the second quarter of the year, compared with 2005.

Can it last?

Who knows? Some people suggest not. Prices are high compared to wages and rents. Renting a property, on average, is only 55 per cent of the cost of buying one. The Economist last week suggested that the UK housing market was over-valued by at least 35 per cent and possibly by as much as 50 per cent. In that case a crash should eventually come.

But people have long been predicting that. The historical evidence is that money invested in property for the past half-century has been, well, as safe as houses.

Other countries offer contrasting lessons. There is inflation in the global housing market too. Last year the highest house price rises were in Denmark (23.6 per cent), Belgium (18 per cent) and Ireland (15.4 per cent). But in Germany houses are worth the same today as they were in 1997. And in Hong Kong and Japan they have crashed - losing a third or more of their value. Prices can go down as well as up.

Do we want it to last?

In most areas of economic life inflation - rising prices - is considered an ill. But with houses most of us see ourselves, for most of the time, as latent sellers, and only occasionally as active buyers. Nevertheless ever higher prices have some ill effects. They effectively transfer wealth from those without houses to those who have them. Rising house prices make the rich richer and the poor poorer.

High house prices also force wage costs up. Employers have to pay salaries sufficient to enable their staff to live in the area where they work. High house prices tend to cut the rate at which the nation saves. When homeowners feel confident that they are sitting on a profit they save less and spend more. High house prices thus fuel consumer spending.

The need to calm the housing market is one of the factors the Bank of England's Monetary Policy Committee takes into account when it decides to raise interest rates. And if we were really concerned about rising house prices we could relax planning laws. But that is unlikely to happen. The truth is that rising house prices, for all their downside, make the majority of the population feel good.

Is there a general economic upside to inflated house prices?


* They increase the feel-good factor for the majority of the population

* They allow pensioners to downsize and release capital for their old age

* They increase consumer confidence and boost spending


* They make the rich richer and the poor poorer

* They make it hard for nurses, teachers and other "key workers" to live in high-cost areas like London

* They increase the risk of repossessions and bankruptcies