For decades we’ve been persuaded to believe that high house prices are good for home-owners and good for the economy. In reality that’s not the truth.
Almost everybody, including home-owners, would be better off if house prices were lower. The economy would be much stronger, too.
Here’s why.
Money that goes into housing is usually never seen again. If it’s rent, it’s gone forever, and if it’s a purchase the chances are it will be followed by another purchase, since people need somewhere to live for the whole of their lives. Even when money comes out of housing, when people are downsizing, or when they die, there’s a good chance that much of it will go straight back into housing for the next generation.
Money locked up in housing is frozen money. It doesn’t flow through he economy helping people to create wealth. So the less that is locked up, the better for the economy, because more is available to help people do and make things that will improve the quality of their lives.
And the strange thing is that even people who own houses are better off when prices fall. Most homeowners are either looking to scale up to a bigger house or to help their children onto the housing ladder, so they’re almost always going to be better off when house prices are on the way down. See this for yourself by using one of these housing cost calculators.
What about negative equity? How do we manage the transition to permanently lower prices?
Change is often worrying, and finding that your house is worth less that your mortgage is definitely like that. But if the money you’re paying is going to stay in housing then you will still be better off with lower prices. On average, the bigger house you’re planning to buy will have fallen in price more than the fall in value of your current house.
So the problem is really a practical one of how the mortgage company is going to deal with your negative equity. The answer is that they will deal with it much better if they know that this is part of a national strategy to get house prices lower and put more money into the real, productive economy. The government can help, too, with guarantees and transitional assistance.