As house prices return to near their 2008 peak, many will be excited. House prices are often used as a proxy for economic health. Why housing should be so different to any other good, where we gauge economic progress by products becoming cheaper, is rarely explained. Truly, housing has been artificially inflated by tight planning regulations. Local homeowners have strong incentives to vote for politicians who will ensure strong planning regulation, and keep the prices of their houses (which are often their main assets) artifically high.
This has contributed to a housing crisis, where now housing prices are so high compared to wages that many are struggling to get on the property ladder. Simultaneously the market continues to be inflated by artifically cheap credit. Allister Heath writes on the problems of these housing bubbles:
Given how over-valued the London market is, and its dependence on a troubled City and declining bonuses, as well as on potentially fickle foreign cash, a severe readjustment at some stage is a strong possibility, despite supply shortages. London property owners should resist succumbing to delusion. It is also dangerous for the government to encourage first time buyers to jump into the market when prices are falling in much of the country. And at some point, the Bank of England will hike interest rates – and then all bets will be off.