View from City Road: Housing hopes built on shaky foundations

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The Independent Online
Kenneth Clarke may not want a return to the frantic housing market of the 1980s - or so he was busy insisting to MPs yesterday - but an awful lot of home owners would secretly love to see the Chancellor disappointed.

Hence the unnatural amount of time and energy spent on examining the twitching entrails of the house price indices produced by the Halifax building society et al.

Their latest offerings have been taken to offer some comfort to the cautious Chancellor - they seem to show the nascent recovery quashed by a loss of nerve on the part of the buying public, as higher taxes and talk about higher interest rates take their toll.

Real doomsters have added that the seven boom years up to 1989 saw real - inflation adjusted - house prices rise by almost 90 per cent. So far they have given up less than a third of their gains, suggesting there is scope for continuing falls in real terms.

Not everyone agrees. Much heat has been generated by the fact that the top end of the London market is showing signs of firm recovery, driven as it is by City bonuses and overseas buyers. Some have used this evidence to call the beginnings of the recovery. Others argue that the pounds 500,000 properties of Mayfair and Hampstead are a mere fragment of the UK's housing economy, and only limited conclusions can be drawn from their behaviour.

One of the few facts everyone can agree on as far as the housing market is concerned is that ultimately real incomes are the main determinant of house prices.

The long-term trend has been for the average property to cost about 3.7 times earnings. The collapse in real house prices over the past few years and the continuing growth of real incomes has moved this ratio down to abnormally low levels of around 3.3 times. A return to trend would push the average house price up 12 per cent from pounds 62,000 to pounds 70,000.

Doubtless the Chancellor is hoping that when this happens, it will be gradual and smooth. Equally assuredly, history is against him. A much more likely scenario is that this latent buying power will kick in suddenly once confidence returns.

The longer house prices remain depressed while earnings are rising, the greater the eventual surge is likely to be. Real incomes are rising by around 2 per cent a year - which means that house prices have to rise by at least 5- 6 per cent, double current forecasts, simply to keep the relationship stable.

The psychology of the merry-go- round is very strong in the housing market. The greater the spurt, the greater the potential for another destabilising round of boom and bust.