Exploding the housing market myths

If you want to encourage divorce and speed up family breakdown then by all means build more houses

THE SUN is shining, house prices are rising and some of my favourite pieces of nonsense about housing markets are getting one of their regular airings. Here is my current Top 10.

Myth 1: "At the moment there are more buyers than sellers."

This is nonsense at an impressively large number of levels. Every time there is a sale there is a buy so sellers and buyers have to balance. What the proposition may mean is that prices do not clear the market because there is, on average, more than one buyer prepared to pay the transaction price for each house actually sold. And, by implication, the thwarted buyers cannot do anything about this. This proposition might be true of the demand/supply balance in a centrally planned economy where prices are set by bureaucrats and queues are endemic. But the idea that the asking price of a house does not move up when more than one person is prepared to pay that price is false. Price nearly always rises by just enough to make all but one potential buyer grumpily skulk off. If this didn't happen estate agents, who are the agents of sellers, are doing a rotten job.

Myth 2: "People are now buying houses as places to live in, not for speculative reasons."

The only real sense I can make of this proposition is that people are, supposedly, no longer trying to figure out what the price of the house they are about to buy might be in a few years' time. But people would be mad to "stop speculating" if that means no speculating about future values. "Speculation" means "thinking about". Anyone who bought a house without speculating on its future value is crazy. So this proposition boils down to one which asserts that people are myopic, irrational and ... well ... crazy.

Myth 3: "Inflation will now be low and that is bad for housing."

Real house prices are what matters when we think about the true value of bricks and mortar. The fastest fall in real house prices in the UK occurred in the mid-Seventies when inflation was at its highest. The greatest destroyer of the real value of houses in the UK has been inflation; house prices fell in the early-Nineties because interest rates increased sharply as the government tried to counter sharply rising inflation. (See Table)

Myth 4: "This time it's different ... we will not see house price booms like the Eighties again."

Why not? Certain fundamental features of the housing market have not changed: the amount of land in the UK is fixed; the supply of houses is (in the short-term) fixed; incomes tend to rise; people need to take a view on where they think prices are going in order to work out when to move and what kind of house to buy.

A somewhat more specific version of Myth 4 is ...

Myth 5: "People got burned in the late-Eighties, and they have long memories."

"Long memories" implies that people do not attach a great deal of weight to recent house price changes in forming a view on where prices are going. I know of no evidence that this is so, but plenty of evidence to the contrary. If one is trying to explain volatility of prices and of transactions in the UK over the past 40 years, it is pretty clear that an explanation which assumes people attach a lot of weight to recent conditions and very little to the more distant past in deciding when and what to buy has a better chance of success than an explanation which assumes "long memories".

Myth 6: "When the UK joins a European Monetary Union there will be a house price boom."

First, it is not at all obvious that when the UK does join Emu the European Central Bank's interest rate will be much different from the rate the Bank of England would set. Second, UK bond yields (which tie down the rates set by mortgage lenders on fixed rate loans) already have largely converged on Euro levels. (This is obvious if one calculates so-called "forward rates".)

Myth 7: "We must build four million new houses - largely in the South- east - or there will be a housing shortage."

If no new houses are built there will be no shortage - there will just be higher real house prices. If we want to stop real house prices rising as fast as they otherwise would, building lots of houses will achieve this and will encourage faster household formation rates. Encouraging faster growth in household formation is largely a euphemism for encouraging divorce and family breakdown. If you want to encourage divorce, speed up family breakdown and reduce green space then by all means build more houses. But to talk about "shortages" is misleading, unhelpful and probably harmful.

Myth 8: "House price differences between regions in the UK are far too great and are bad for labour mobility."

On the contrary, house price differences are likely to alleviate crowding in densely crowded areas by encouraging firms and workers to move to areas where the cost of living is lower. The South-east of England is already too crowded and transport systems are cracking. People should be encouraged to move to less crowded areas where houses are empty. Big regional house price gaps help this process.

Myth 9: "Prices just can't keep going up."

Fixed supply of land, rising incomes ... say no more.

Myth 10: "As house prices go up the value of the UK's stock of wealth goes up and we are, nationally, better off."

The problem with this is that UK houses are, overwhelmingly, lived in and owned by current and future UK households. Physical characteristics of houses do not change when prices rise sharply in a boom and it is those characteristics that are valuable. Price rises are a means of rationing demand to match supply; they do not make us better off. This is more obvious when we focus on land - a commodity in fixed supply and whosecharacteristics hardly change. Rising land prices, per se, do not increase national productivity and do not enhance standards of living.

Most of these myths are harmless enough but some are not. Myth 7 is very harmful since the government seems to believe it and appears to be acting on it.

David Miles is Professor of Finance at Imperial College and an adviser to Merrill Lynch.

Start your day with The Independent, sign up for daily news emails
News
i100 In this video, the late actor Leonard Nimoy explains how he decided to use the gesture for his character
Arts and Entertainment
Secrets of JK Rowling's Harry Potter workings have been revealed in a new bibliography
arts + ents
News
Down-to-earth: Winstone isn't one for considering his 'legacy'
people
News
news
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: HR Benefits Manager

£40000 - £50000 per annum + pro rata: SThree: SThree Group have been well esta...

Recruitment Genius: Office Manager / Financial Services

£30000 - £37000 per annum: Recruitment Genius: Established in 1999, a highly r...

Jemma Gent: Year End Accountant

£250-£300 Day Rate: Jemma Gent: Are you a qualified accountant with strong exp...

Jemma Gent: Management Accountant

£230 - £260 Day Rate: Jemma Gent: Do you want to stamp your footprint in histo...

Day In a Page

HIV pill: Scientists hail discovery of 'game-changer' that cuts the risk of infection among gay men by 86%

Scientists hail daily pill that protects against HIV infection

Breakthrough in battle against global scourge – but will the NHS pay for it?
How we must adjust our lifestyles to nature: Welcome to the 'Anthropocene', the human epoch

Time to play God

Welcome to the 'Anthropocene', the human epoch where we may need to redefine nature itself
MacGyver returns, but with a difference: Handyman hero of classic 1980s TV series to be recast as a woman

MacGyver returns, but with a difference

Handyman hero of classic 1980s TV series to be recast as a woman
Tunnel renaissance: Why cities are hiding roads down in the ground

Tunnel renaissance

Why cities are hiding roads underground
'Backstreet Boys - Show 'Em What You're Made Of': An affectionate look at five middle-aged men

Boys to men

The Backstreet Boys might be middle-aged, married and have dodgy knees, but a heartfelt documentary reveals they’re not going gently into pop’s good night
Crufts 2015: Should foreign dogs be allowed to compete?

Crufts 2015

Should foreign dogs be allowed to compete?
10 best projectors

How to make your home cinema more cinematic: 10 best projectors

Want to recreate the big-screen experience in your sitting room? IndyBest sizes up gadgets to form your film-watching
Manchester City 1 Barcelona 2 player ratings: Luis Suarez? Lionel Messi? Joe Hart? Who was the star man?

Manchester City vs Barcelona player ratings

Luis Suarez? Lionel Messi? Joe Hart? Who was the star man at the Etihad?
Arsenal vs Monaco: Monaco - the making of Gunners' manager Arsene Wenger

Monaco: the making of Wenger

Jack Pitt-Brooke speaks to former players and learns the Frenchman’s man-management has always been one of his best skills
Cricket World Cup 2015: Chris Gayle - the West Indies' enigma lives up to his reputation

Chris Gayle: The West Indies' enigma

Some said the game's eternal rebel was washed up. As ever, he proved he writes the scripts by producing a blistering World Cup innings
In Ukraine a dark world of hybrid warfare and murky loyalties prevails

In Ukraine a dark world of hybrid warfare

This war in the shadows has been going on since the fall of Mr Yanukovych
'Birdman' and 'Bullets Over Broadway': Homage or plagiarism?

Homage or plagiarism?

'Birdman' shares much DNA with Woody Allen's 'Bullets Over Broadway'
Broadchurch ends as damp squib not even David Tennant can revive

A damp squib not even David Tennant can revive

Broadchurch, Series 2 finale, review
A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower: inside the mansion of Germany's 'Bishop of Bling'

Inside the mansion of Germany's 'Bishop of Bling'

A Koi carp breeding pond, wall-mounted iPads and a bathroom with a 'wellness' shower