Another boom in house prices – followed by the inevitable bust? Or a series of steady but modest increases, reflecting the growth in the population and real demand for somewhere to live?
It matters hugely. It matters for the economic recovery. The present buoyant growth is driven by rising consumer spending, and that, in part at least, is on the back of the wealth effect generated by higher house prices. If the value of people's assets rise they feel more comfortable about spending more, even if that means running down other savings. This is the "wrong sort of growth" worry, which is genuine enough even if a lot of us think we should not be too picky right now. Any growth will do.
It also matters socially. The boom/bust cycle redistributes wealth in a capricious and unfair way. It is pretty much pure luck on when people reach the stage of buying their first home. Hit the market in a dip and you are well ahead for life; hit it at peak and you are struggling for a decade or more. But the steady rise also redistributes wealth, and one of the criticisms of these very low interest rates is that by boosting house prices they redistribute wealth to the already wealthy. They also shift it from the young to the old and from renters to owners.
It matters geographically. The surge of prices in the South-east and the capital, particularly prime London, has the effect of redistributing wealth from north to south. The main reason this is happening is the stronger job market in the south, so the differential movement in house prices is principally a reflection of what is happening in the economy rather than a cause of it. But there is a feedback loop in that the need for more homes in the south further increases jobs and economic activity there. Three-quarters of the cranes in the UK are in London and the Home Counties.
So what's to be done? Well, the first thing is to recognise that this is bigger than government. No government can control house prices. Sensible macroeconomic policies will contain booms and reduce the impact of slumps, but the general level of prices will be set by supply and demand. However at the margin, policy can help – or otherwise.
That leads to an important principle: do no harm. Do not artificially stoke up a house price boom. Stopping the Funding for Lending scheme for mortgages and restricting it to business lending removes one source of potential harm. As for Help to Buy, the best thing that can be said about it is that given the size of the housing market, it probably is not big enough to do too much harm.
Nor can governments do much about demand for homes. The UK population is rising by about 400,000 a year, and you don't need to be a wizard at maths to figure out that we are likely to have to fit in another four million people over the next 10 years. Maybe inward migration will fall a little but it is just as likely to increase. Maybe we could use our existing housing stock more efficiently, and one effect of high prices is to pressure us to do so. But that is a short-term fix. People like space. Cramming them together is not a recipe for social harmony at either domestic or national level.
So we have to increase supply. A fair bit of the Chancellor's Autumn Statement last week was devoted to that. In one sense we are lucky in that there is some space. We are not Hong Kong, even Japan. But building decent, pleasant, stylish homes in places where people want or need to live is a challenge. We have made huge errors in home-building in the 1960s and 1970s, with all those tower blocks that are now being pulled down. It would be nice to think that we are doing better now, but since we seem to be building the smallest homes in Europe, I fear we are repeating the mistakes of the past, albeit in slightly different form.
Let's assume, though, that we can increase supply a bit, and let's assume that the forthcoming rise in interest rates is gradual and restrained. What might this mean for prices?
Here we step into a minefield. Anyone saying anything about the future of house prices is liable to have their predictions blow up in their face. They are up 8 per cent over the past year. Few predicted that. The Office for Budget Responsibility has increased its own projections sharply, expecting annual increases of between 3 and 7 per cent through to 2018. Who knows? What I think you can say is that homes will continue to bear some relationship to earnings and that there seems to be a bottom band of about three times earnings and a top band of five times, maybe six. We are pretty much at the top of that band now. While houses are reasonably "affordable" in the sense that low interest rates have cut monthly repayment rates, they could quickly become less so when rates rise.
Some have argued that the weight of personal debt is so great that the authorities cannot increase interest rates by much. That might be wishful thinking. However, given this burden of debt, quite a small increase of rates would be effective in holding down house prices. That leads to a common-sense conclusion. It is that house prices will not be allowed to go mad again, or at least not until the recent bubble becomes a distant memory. But they are not going to fall much either, for the underlying demand is far too strong.