Why did house prices rise in the depths of recession?

In part, prices went up because although demand was low, supply was even lower. This column said throughout this period that in such circumstances it would take only a modest change in the key supply and demand variables to have a major effect on price.

The bulls say rising prices are inevitable because the UK’s population is rising and the supply of property is constrained.

But the truth is, there is another factor, always present, pushing up on house prices, and it relates to the faith Brits have in their home as a kind of castle offering security against the savage economic world.

The saying that an Englishman’s home is his castle is just one metaphor illustrating the importance of property in the British psyche. Here is another: ‘The housing ladder’.

You hear the words ‘property ladder’ bandied about so much that people forget that property, just like shares, can go down as well as up. If investment companies started talking about the equity ladder, no doubt the FSA would come down on them like the ton of bricks that should have been used to build a home. But you can’t ban words from popular usage.

The Brits’ obsession with property may have been moulded in the midst of 1970s inflation, when the true cost of mortgages crashed within a few years of taking them out, as the rate of interest lagged wildly below the inflation rate. Or it may have been moulded in the aftermath of the Second World War, when property prices relative to income really were cheap. Or maybe it was a combination: house price inflation in the 1950s and 1960s because prices were cheap to begin with, followed by house price inflation thanks to negative real interest rates.

The bulls say further rises in house prices are inevitable, going by the latest data out this morning predicting the UK’s population would rise to 78 million by 2051, from 59 million in 2001.

The bears argue that house prices cannot stay at current levels indefinitely, because they are simply unaffordable. The bulls say: “What are you talking about, mortgages are affordable because interest rates are low.” The bears say: “What about the principal. It is all very well saying interest rates are low, but you still have to pay back the sum you borrowed in the first place. In any case, interest rates may go up.” Besides, they argue, the market needs first time buyers, and right now, this is an endangered species. The bears have one more argument. They say that in the long run, regardless of the demographics, people will find a way of coping with low supply. For example, it may become more common for house-shares.  People who own large homes may let out some rooms. A couple of years ago we ran a story focusing on this argument see: Housing under-supply myth: house price crash may bring families closer together

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