The argument that house prices are justified by low supply does have some merits.

But let’s take a look at some key points here.

For one thing, there is evidence to suggest that around six million home owners live in houses that are bigger than they need – two spare bedrooms or more. That is to say there is space in their homes lying idle. But look at those who rent their homes, and it is very rare to find such spare space. So why is that? Maybe it’s because homes owners see their houses as an investment. They assume that because we live on an island, land is in short supply, and that house prices can only go up. In this way it becomes self-fulfilling.

Except, according to the Equity Release Council, no less than a quarter of million retiring baby boomers plan to downsize later this decade.

This is what the Bank of England said recently about lending data: “Aggregate data may…mask important distributional changes. For example, the 2011 NMG survey reported that since 2007 the proportion of borrowers reporting difficulties in keeping up with housing payments increased from 7.5 per cent to 10 per cent and the proportion finding unsecured debt a ‘heavy burden’ or ‘somewhat of a burden’ increased from 38 per cent to 46 per cent. This reflects a squeeze on real incomes and tighter credit supply. Despite evidence of repayment difficulties, however, write-offs on mortgage lending remain low, possibly reflecting forbearance by banks. The FSA’s recent review found that 5 per cent to 8 per cent of UK mortgages are subject to forbearance.”

What you need to bear in mind about house prices is that that the cost of buying a home is substantially in excess of the cost of building one. House prices could fall much lower and still house building would be economical providing, that is, that the cost of land falls.

So let’s imagine house prices were a lot cheaper, so much cheaper that we see a surge in demand from first time buyers. That would be good for the economy because we would see a rise in construction jobs. And let’s imagine that house prices remain cheaper, so that over the long term households find that they only need to commit a relatively modest proportion of their incomes to their mortgage, even if interest rates move higher.

Would the UK not be better off?

One of the snags with the UK economy is that growth often translates into higher house prices, and thereby sucks some disposable income out of the system.

The problem is that the magic of leverage has made millions of home owners in the UK vulnerable.

It would not take much to spark off a home building boom from a base of lower prices, and that does not create runaway house price inflation. The government could create the conditions.  In the long run this would be good for the economy, but it would be bad for the baby boomer generation who are so vital for a political party’s election prospects.

So the question is: dare the government act?

Let’s close by looking at David Cameron’s call to stop dithering, squatters, and how taxation can help.

House prices – the danger of leverage

UK versus US house prices: overpriced and over here

Are UK house prices justified by low supply? 

Stop dithering and squatting

©2012 Investment and Business News.

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© Investment & Business News 2013