James Ferguson shocked a few readers at the MoneyWeek conference two weeks ago when he said that average house prices across the UK are no longer particularly overpriced relative to household income, they are just about in line with historical averages.
That doesn't mean they won't fall if interest rates rise sharply. And it doesn't mean that they won't keep rising if the government continues to relentlessly fiddle national policy in their favour. It just means that it is no longer reasonable to refer to a UK-wide bubble.
We actually entirely agree with James on this one. We have pointed out numerous times in the last year that in much of the UK there has been a proper house price crash. In parts of the north and west, prices have fallen a good 40% (and could now even be considered undervalued).
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In the southeast, inflation-adjusted prices had at one point fallen some 25% from their peak. And even now, with the rises of the last year taken into account, prices adjusted for consumer price index inflation are down 16%-17%.
The problem, as we see it today, is not that we have a nationwide bubble, but that we have nasty pockets of bubble in London, and near-bubble in bits of the southeast that distort the numbers.
This makes things seem worse than they are, and encourages stupid policy responses from our house-price-driven government.So, we were interested to see a new report out from Knight Frank suggesting something similar.
It notes, says the FT, that while "large swathes of the north and east" are fairly priced and still seeing prices "falling or stagnant", prices in "London and its hinterland" have now risen such that they distort the national picture.
Even the deputy governor of the Bank of England Sir Jon Cunliffe noted, this month, that house price averages are now the "brightest warning light" in the UK economy.
So, here's the question. Which of these two different markets (basically, the rest of the UK versus London) is better for all of us? And given that answer, what is the best policy response?
We prefer the first. We like about right' house prices better than we like bubbles. If we were in charge, we'd want prices to stay about right in the north, and fall to something a bit nearer to about right' in the southeast and London (which is a much higher level than the about right' of the north).
So, we'd dump Help to Buy which has done nothing but stoke demand in the south, such that it is now significantly harder for the first-time buyers everyone is so keen to help to buy starter homes than it was even a year ago.
We'd loosen planning rules so everyone knew there was no need to panic buy into a rigidly state-rationed amount of stock. We'd slowly raise interest rates to somewhere around normal levels (given inflation of around 2%, a normal base rate would be about 4%, making mortgage rates 5%-6%). We would, in essence, leave the housing market to the market.
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