Sean O'Grady: Rising house prices in a slump? Madness reigns

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The Independent Online

It isn't so very difficult to fathom what is happening in the housing market, perverse as it may strike one. It is a matter, as the estate agents have been telling us for the past few months, of a "shortage of supply". It is this magic factor that apparently kept prices up during the second half of last year – probably with a little help from the Bank of England's ultra-low interest rates and a £200bn cash injection into the economy – and the trickle of buyers coming on to the market since January may soften prices over the coming months.

Other, even shorter-term effects, come and go. The political uncertainty during, and after, the election, will eventually resolve itself. The stamp duty holiday that ended on 1 January on places worth less than £175,000 helped in some parts of the country, though probably less in the South. The new stamp duty holiday, this time on properties priced at £250,000 and under may also mobilise first-time buyers for a while.

The "shortage of supply" story is in fact a housing slump that never was. At the end of 2008, the worst year in living memory, values were down a fifth, and worse was feared – anything from another 10 to 30 per cent over 2009 – adding up to a near 50 per cent drop on peak 2007 valuations. That was because the recession was due to turn into a Great Depression. That it did not was down to the international action by governments and central banks to spend and lend their way out of trouble. Record-low interest rates slashed mortgage bills, much to the relief of hard-pressed families. Wage restraint kept unemployment in check and defaults down. There was also unprecedented forbearance exercised by the banks and building societies. It was not all altruistic. For much of the time they were too frightened to crystallise losses on their already anaemic balance sheets. Repossessions were thus lower than feared, and lower than in the 1990s. Prices rose 6 per cent over 2009.

Yet some uncomfortable fundamentals will soon show through. Over the next year, interest rates will creep up, taxes will rise, public sector jobs will go and disposable incomes will suffer. The banks are still wary of lending, and 25 per cent deposits for young buyers – say £50,000 in London – are demanded.

It is difficult to see the housing market bouncing back with such a miserable background – except for something that few commentators have given sufficient weight to. Housing in Britain has gone from being a rational choice about renting or buying at the right time, and turned into a cult. Blame Mrs Thatcher's preachings, or the unreliability of alternatives, such as pension schemes. But for whatever reason, today's twenty-somethings have a powerful sense of entitlement about home-ownership, and are willing to sacrifice almost everything, maybe even food, to pay for the privilege.

When will the madness end?