Do we really want house prices to go up again? BBC analysis skirts the key issues again

Today there has been a big buzz around the fact that house prices are on their way up again. But is this a good thing?

Many people that follow Positive Money will know our answer…NO! For our detailed analysis and video click here.

But it does seem that the analysis on the BBC is creeping towards something that resembles reality. This morning, on the BBC Radio 4 Today show Evan Davis interviewed Merryn Somerset Webb, the editor-in-chief of Money Week, who gave a really clear analysis of why rising house prices are not good for anyone including people that already have a house. She stated,

‘[Rising house prices are] an entirely unproductive part of the economy . The theory goes that house prices rise, people feel happier that they have more money, and we get a boost in GDP. But it’s temporary, it’s unproductive, it’s not a good way to boost economic activity.‘

She went on to say:

‘Where it is a problem is in the bubble areas in London and the south east, where prices are already at worse bubble levels than the peak of the last bubble areas. We don’t want to have an economy based on the encouragement of bubbles.‘

But after this excellent analysis Evan Davis leaves a big part of the story out in during his later questioning to Brandon Lewis MP, Communities Minister. He asks:

‘If house prices are going up, because we have more demand than supply, or to put it another way – because we haven’t built enough homes for people – that is bad news right?‘

But is it a demand-supply problem? Why would house prices suddenly start rising due to a demand-supply issue? Surely the country hasn’t experienced a sudden  population rise over the last few months? Or were some houses destroyed overnight?

What Evan failed to ask in this question is the fact that a big part of sudden house price rises has nothing to do with demand and supply, but much more to do with mortgage lending, i.e. how much newly created money is flowing into the property market. He gets to that point eventually:

‘One of the chief causes of the turn around…is Funding for Lending [a Bank of England scheme to encourage banks to increase their lending]. The interesting thing about Funding for Lending is that it has done more to stimulate the housing market than to businesses lending…Are you disappointed?’

Brandon Lewis MP later replied about the effects of lending to mortgages vs. businesses and said:

‘Whether it’s for house building or whether it’s for business lending, it’s got to be a good thing for our country.’

His analysis that lending to mortgages is somehow lending for house building is worryingly misguided. If lending was directly to house builders to start building, that would be lending to house building. Lending to mortgages which fuels a house price bubble, may eventually stimulate house builders to start building because they see an asset bubble growing. But it is a secondary effect.

Higher house prices aren’t good for the most of us. We all need somewhere to live after all.