Housing market problems transfer wealth back to less well off

Jun 6 2008 By Nevill Boyd Maunsell

For more than a decade we have lived in a world where house prices rose relentlessly, in several years by double digits, while the prices of everything else did nothing much.

If you spent most of your money on computers, cameras, even cars, they were falling. It was labelled low inflation, arguably rightly in that pay – for those of us who were not bonus-blessed investment bankers – never chased those giddy house prices. The Bank of England insisted resolutely that house prices were nothing to do with inflation, so not its business.

To make sure there was no mistake, Gordon Brown, as Chancellor, nailed its inflation target to an index that leaves out all the costs of buying a home, even council tax.

Now in the brave new world of 2008 the opposite is happening. House prices are falling and the price of everything else (still except computers, cameras and second-hand cars) is shooting upwards. It is not labelled high inflation, just the threat of it, but a clear enough threat to stop the Bank cutting interest rates as many confidently supposed it would just six weeks ago.

Pay rises are quickening – though not in the public sector. But at an average of 3.8 per cent over the past 12 months they are still short of inflation of 4.2 per cent on the Retail Prices Index, the one people distrust the least.

So living standards are slipping, even without much unemployment. For anyone who drives a lot, spends a fair bit of the family income on food and lives in a poorly insulated home they are slipping alarmingly.

And that leaves out the plight of those who saddled themselves with an unwisely chunky mortgage any time in the last two years.

This is novel territory. House prices took a nasty tumble in the early 1990s, but that was in an all-purpose recession, with rampant unemployment and interest-rates driven into double figures by a mismanaged currency crisis. Everything moved in the same dire direction.

We have no folk memory of how to expect life to work when house prices are falling and other prices are driven skywards by a global energy and commodity boom that British interest rates cannot influence.

Rising house prices transferred wealth from the (non-investment banking) young, whose pay rose more or less with productivity, to the old and middle-aged living in homes they bought for a pittance decades ago, which they could re-mortgage at will.

If falling house prices now do the opposite – transfer some wealth back to those who can no longer afford to buy an average home on anything like average pay – we should welcome them

The curmudgeonly elderly may shudder, but they have had a terrific decade.

The value of their bricks and mortar rose by 190 per cent over the ten years to last August.

Make no mistake, though, house prices really are sliding now.

The Halifax index has tumbled by 6.6 per cent in just six months.

Unhappily, that is no comfort if you cannot get a mortgage for the purpose – and there is going to be no mad scramble to get a foot on the housing ladder until the rungs stop rotting.