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No chance of a house price crash

David Miles. Miles ahead or miles behind? Economic guru John Wriglesworth perhaps hit the nail on the head last week when he said Miles was talking “through his proverbial”.

“He should go back in his box and stick to being an academic,” he tells Mortgage Strategy. And well said too. With the average price of a house near the 200,000 mark and residential property making up over half of household net wealth, whether the housing market is going to crash or otherwise makes regular pub conversation.

And it’s a worrying topic. A housing market crash would be devastating – both to the mortgage market and the UK economy as a whole.

And as the Centre for Economics and Business Research said last week, with house prices rising by 10.2% on average every year since 1996 and average gross earnings rising 4.2% every year, the ratio of house prices to incomes has increased from 4.4 to 7.9 in the same period.

It is an easy and lazy argument to make that the house price inflation seen in recent years is driven by speculation, and we all know that speculative bubbles must all eventually burst.

Yet there is a fundamental flaw in this argument and perhaps one that Miles easily forgets. The demand for houses far exceeds the supply of houses and it is a mismatch that will continue well into the foreseeable future.

For one, there are not enough houses. To bring house price growth down by a significant amount, the UK needs to build 245,000 houses every year.

And second, the population has grown because more of the world’s people want to live in the UK. Third, would-be home owners do not compare their income to the price of a house – they compare their income to mortgage payments.

The message is simple. As long as supply continues to fail to react to the growing demand for housing, it seems highly unlikely that house prices will crash.


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