Thursday, May 29, 2008

Are house prices collapsing?

There is more doom and gloom about with the latest survey from the Nationwide about house prices. Apparently they have fallen for the 7th month in a row. (The BBC has this)

There is an interesting if gloomy article in the Guardian here which not only points out (as the BBC article does) that the rate of fall since this time last year is 4.4% the worst since 1992, but that over the last 3 months it has been falling at an annualised rated of 16%, worse than since the Nationwide started to collect this information.

Is this a good thing? Well, house prices are ridiculous, so in the long term a correction is good. In the short term however it is dire. It is going to cause people untold pain and will cause pain in the wider economy as well.

It has been obvious to me that housing had become and asset bubble for some years now, and we all know that these bubbles burst. We also know that causes pain, which is not good. The question is what can be done about it in advance? It is a hard one, but have to wonder what interest rates would have done to the housing market if they were tied to RPI not CPI. The former includes for housing costs the latter does not. Would that have curbed the excesses of the housing market, defusing the bubble before it burst?

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