Cover of MoneyWeek magazine issue no 476

The next gold rush

5 March 2010 / Issue 476

There's money in rubbish dumps...

PLUS:

  • A cheap manufacturer to buy now
  • A sterling crisis is exactly what Britain needs
  • Zombies are sucking the life out of China's economy

Excerpt

Why falling house prices matter

Every time I write about house prices, people ask why it matters if prices fall. After all, they’re far too high. So the lower they go and the faster they hit bottom the better – right? Yes and no.

There is no fighting with mean reversion and, bar a few speculators, we all want housing to be affordable. The problem is not with the end result of house price falls – it’s in what happens along the way.

In no other country are house prices so closely linked to economic performance. An OECD study a few years ago showed that, between 1971 and 2002, every 1% change in the value of British housing stock led to a 0.7% change in consumer spending. A strong economy creates higher house prices via rising incomes and falling unemployment. But in Britain, higher house prices themselves make the economy look even stronger.

In 2003, we felt so confident in our housing wealth that we took equity out of our homes to the tune of around 9% of our total disposable income. Even in 2007 we were still taking out 6% or so. Then we spent it.

• Read the full editor’s letter here:
Why falling house prices matter