Predictions for 2006

The housing 'bubble' is not going to burst. Publications like the Economist, which should know better, continue to suggest that housing is overpriced in the UK, despite considerable evidence to the contrary. The usual analysis for arguing this is to say that prices, relative to incomes, are at historically high levels.

There are two problems with this. First, it addresses only the demand side of the equation, and secondly, it does even this inadequately.

Prices are a product of supply and demand and the critical factor driving values of real-estate has always been restricted supply. Supply restrictions are not the result of land shortage, despite the old adage "buy land, they've stopped making it" but of restricted consent to build. Planning permission is a government monopoly product which, despite government assertions that they want more 'affordable' housing, is generally becoming more restrictive.

The calculation of affordability is itself inadequate if it fails to take account of low mortgage rates, since almost no-one buys houses out of current income. People service debt out of current income. Thus, though prices are higher in real terms than in the late 80's, just before the last real crash in house prices, interest rates were very much higher then, so for anyone buying housing on a mortgage, affordability remains easier now.

To address the supply side, it is clear that supply remains restricted, though not quite as badly as in 2001, when the current round of 'bubble' predictions began.

From 2000 to 2004 there were 928,650 new dwellings completed. This compares to 1,114,065 in the years from 1985-89 and 1,641,908 in the years 1970 to 74. Not only were the two price contractions preceded by larger numbers of housing completions, the market was aware that supply was outstripping demand, and both periods showed a declining trend. From 1970 to 74 the period showed a decline from 362,226 to 279,234. From 1985 to 1989 the figures were stable, showing a decline only from 1990. From 2000 to 2004 completions rose from 178,088 to 202,748. This period included the lowest number of housing completions since the war, in 2001.

So ignore all those who predict a crash. It seems only fair. They are ingnoring the facts.

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