House Price rises over inflation only seemed to start when lenders with too much money available allocate on the premise that whatever the valuation it would be higher in the future and irresponcible lending was not punished.

I have always thought that Gordon Brown made a major mistake in not ensuring that house price inflation did not get away from him by punishing irresponcible lending.
3.5 times annual income seems a sustainable level historically.

If in the event of repossession, irresponcible lending was shown i.e. more than 3.5 times anual income then the lender would not be able to recover any deficit from the borrower, this problem would not arise.

Simple, but the lenders would oppose this because they know this would be effective.

M Sheridan, Oldham, UK

House prices are being artificially inflated (as the article suggests) by buy-to-let investors. But not all of these are property magnates. The majority are looking for ways to ensure a comfortable retirement who have recognised that the pension system is fundamentally broken (caused in part by Mr Brown).

Using the stick on these people is not a holistic answer. There has to be a carrot aswell. Maybe it's time for government to take the lead in alternative financial products (as per PEPs, ISAs) and deliberately incentivise alternative forms of investment which are not as prescriptive as the current personal pension/compulsory annuity purchase schemes.

Richard, London, UK

If it was a simple problem of supply and demand exacerbated by immigrants, as many here suggest, rents would have also rocketed.

In many parts of the UK, renting is cheaper than buying.

Claire Dunbar, Edinburgh, UK

"It is supply and demand. So long as there are more people than houses the trend will continue. The only way to cure the problem is to reduce and control the levels of population."

Actually, that is an often touted but misguided claim. If supply were so low, rentals would be a lot higher (at the very least at parity with mortgage repayments). My rent works out to be roughly half the interest portion of what the current owner paid for the house, assuming he took out a full mortgage of £298 000.

Chantel, UK,

A point missed by some of the contributors is that if the house price bubble is due largely to a lack of supply, why have rents not increased in line with house prices? This appears to suggest that demand for houses as a place to live has not substantially increased, whereas demand for houses as a financial instrument (driven by cheap credit, expecation and a compliant mass-media) has increased exponentially.

There is a significant correlation between periods of rapid money supply growth and periods in which the rich get richer at everyone eles's expense. The current period is somewhat different in that mass participation has created the illusion that everyone is better off because house prices have risen. The rapid credit growth that has fuelled it has been allowed to happen under a "Labour" government.

Steve, St Neots, UK

With Blair gone is it safe to return to the UK? or should I remain in the French countryide,10 minutes from the golf club and five from the village with zero crime.Plus superb medical facilities,traditional village schooling,stable house prices,wine at 2 euros a bottle(good wine)and atlantic oysters at 8 euros a kilo! Or is there something to look forward to with Mr Brown on the horizon?

Alan Beresford, Poitiers, France

If a housing shortage was the problem, then rents would have risen as fast as house prices since tenants also form part of the demand function for property. It also doesn't explain how equally crowded places like Tokyo or Hong Kong managed to have a crushing house price correction in the 1990s.

And why does Mr Harding assume that unemployment has to rise for prices to correct? This is not based on anything other than hope - the US is correctly in the midst of a correction in the context of very low unemployment.

Brett A, New York, USA

It's all New Labour's fault; Gordon Brown abolished income tax relief on mortgage repayments.

This has no effect on private landlords who hold their properties in companies, as they pay income tax on net profit, not gross income.

In very simple terms - buying a property to live in costs 40% more than buying a property to rent. Yes, that's right - people who can't afford to own a property to live in are forced to subsidise those who can afford multiple properties to rent out.

Solution? Tax rental income before costs, not after and give individuals tax relief on mortgages for their first properties. Then those who can afford properties to rent out will subsidise those who are buying homes to live in.

Joe, London,

Blair's Legacy?
James Harding's views may well fit the UK housing market but fails to explain the fact that the same phenomenon has been experienced during the same timescale in other countries (not only in Europe).
As an expat living in Denmark for 28 years I have experienced both ups and downs in the DK housing market which I'm sure that Blair has had little to do with!
Come on guys it's a worldwide phenomenom!

Mike O'Shea, Copenhagen, Denmark

The principle cause of housing shortage is the failure to build council houses: the private sector continues to build about 160.000 a year.

peter york, tonbridge, kent

There are 81,000 empty properties. In Cambridge. Nationwide, it accounts for 1/3 of all properties. There is no housing shortage AT ALL.

Your economist is plainly ignoring all the imminent signs of a house price crash, which is already, very slowly, starting.

Jo, Cambridgeshire, UK

Booming property prices has nothing to do with supply (only in posh parts of London) and nothing to do with immigrants on low wages. Funnily you won't find out much about the true difficulty and the real cure in the mainstream media...

http://www.ablemesh.co.uk/thoughtsonelandtax.html

gordong156, Milton Keynes, UK

Inequality in incomes is now higher than in 1884. Fact.

Jon Kingsbury, Southampton, UK

The best indicator of the true value of a house is in the income it can generate. We currently rent a house that sold for £298 000, yet we only pay £700 in rent. This is less than half of the interes portion, if one were to take a mortgage of £298 000. So, is the house worth £298 000.... obviously not.

We invest the difference between the rent and what it would cost us on a mortgage and get an interest rate of 5.45% on our money, which I might add, does not cost us maintenance, commisission to an estate agent, mortgage arrangement fees or insurance.

At our current rate of saving, we will be able to purchase a house in France with cash.

Chantel, UK,

It seems to me that the shortage of housing is another cock up by Labour that has turned out OK - for them. It has forced up house prices and made people feel wealthy and Labour can claim to be responsible for the wealth. The trouble is that one day a government will have to allow more house building which will bring house prices crashing down. Privately, Brown may be keeping quiet hoping no-one will notice until they are out of office and it will be the Conservatives who will then take the rap for them. If I were Michael Gove I would be making noises about the need for the government to build more houses so that the inevitable crash comes during a Labour government and they can take the blame.

R Mason, London, UK

The problem with the housing market in the UK is that it has become ingrained in the psyche of the average Briton that owning a home is a must and is the safest investment for the average worker. In other countries e.g. Germany, housing is not regarded speculatively. It can be useful as an asset but is not the sole focus of everyone's investment potential. In the USA, equally, housing forms an important part of anyone's stock of assets but the stock market is also important for investment and retirement funds.

In the UK, people focus obsessively on housing as the one and only way to fund retirement. It is a huge mistake as it creates recurring speculative frenzy and thus market instability and endless boom / bust cycles. A courageous government would tackle this with substantial reforms to taxation policy and the reining in of housing credit. That's unlikely, however, as the housing market is stupidly viewed as a stock market for the "working man".

MB, Edinburgh,

To Pete of Edinburgh, 12-13% of very little is still very little. However the 5-6% interest rates on the enormous mortgages common today mean that even small upward movements in rates can spell disaster to the unfortunates saddled with these ridiculous loans. There is only one outcome for this lunatic housing market with its comedy prices and that is a crash.

Steve, Salisbury, UK

The house price and income discrepancy is common in New York City and California too. People invest in these properties with no chance of ever paying them off, but hope to make money in the longer term by gaining equity as the value of the property rises annually.

Errol Back-Cunningham, Newark, Delaware, USA

The government needs to decide whether housing is an investment or somewhere for people to live. Currently it is doing nothing to stem the rise in house prices and the press herald such increases as "good news".

It is not good news for young people looking for somewhere to live. I'm sure there are many in a similar situation as my adult children still living at home because there is no affordable alternative.

I would start by introducing an immediate 100% capital gains tax on second properties including buy to let and holiday homes.

Roger, Basingstoke,

Reducing poverty, as measured in terms of income, has been one of New Labour's great successes. In terms of distribution of wealth, this Government's policies have increased inequality immensly. The suffering caused by the second has been masked by the former, but is becoming more evident to more people as time passes.

The laws underpinning private tenancies and the planning system need radical change. That much must be clear. But more will need to be done to create adequate housing, not just for socially deprived and key workers, without destroying our countryside,

Steve, London, UK

The biggest social cost caused by the housing boom is the loss of the work ethic and associated reduction in social mobility and childbearing.
The poor will be ok as councils always find housing in the end (unless you are male). Its the mid/low earners who are hit as they can't pay market prices but are deemed rich by Comrade Brown who taxes them to futher penury. For most this means kids are out of the question. The debate about why female grads arent having kids misses the point that they can't possibly afford to.

If the poor are ok (ish) and those in low/middle pay are screwed what incentive to move from one area to the other ? Even higher up the scale social mobility is affected. Take that mythical beast an inner city kid who does well and gets an education. Unless they become a bond trader without parental backing buying a home would still be beyond them. Not so the baby factories they went to school with.
Still they'll all vote Stalin forever then.

MatG, london, uk

It might seem a little simplistic but the housing shortage only came about because of a deliberate government policy.

We have built fewer houses in the last ten years than in any other decade since WW2. Homelessness is up 30% since 1997. There are 60% more people waiting for social housing now, than in 1997. There are 135% more people waiting for temporary accomodation now, than in 1997.

Initially rising house prices can drive an economy making people feel richer than they really are. High house prices are an artificial construct in that they make people believe that those in charge of our economy are doing a good job. Ironically for a Labour govt, it's those at the bottom of the ladder; the key workers and first time buyers and as the statistics show- the lowest earners full stop, who are suffering the most. Labour failed to control the rise and there will still be a major shortfall, with it's consequences, for a few years even if drastic house building is undertaken.

Peter, london,

The price of houses in the UK would only be half their present levels if hundreds of thousands of dwellings had not been allocated to the vast army of immigrants that this appalling government has allowed into this country. This has caused a criminal shortage of housing for our own people.

Paul, Aldershot, Hants

Noone wants to tackle the root of the issue, which is that the boom is fundamentally a credit bubble, stoked by the London-based financial markets, and that in turn the London property market is a massive bubble in and of itself, inflated by the presence of non-domiciled residents, (foreign citizens who reside here but pay no tax because of a loophole successive governments have refused to close). Our central bankers have ignored the credit issue while focussing on a narrow and distorted measure of inflation, while money supply races away, and our government squeezes the pips of UK citizens through untold stealth taxes while letting the super-rich live here effectively for free, pushing the cost of housing up for everyone. The London boom drives prices up everywhere, not only in the UK. Addressing the grossly unfair tax system and an explicit commitment to money supply control would be a first step in confronting the problem. Unfortunately it is too late to stop a house price fall.

Paul Amery, London,

The article on housing, as usual, declines to mention one of the biggest issues driving up house prices - mass, uncontrolled immigration.
In the first two months since Rumania and Bulgaria joined the EU, an extra 100,000 people have arrived from Eastern Europe. That's on top of at least 600,000 who arrived from Eastern Europe over the couple of years before that. They all have to be living somewhere. And there have been several million non-EU immigrants over the past ten years or so. And these figures are just the ones the government is admitting to - the real figures could be much higher.
We only build less than 200,000 houses per year. Is it any wonder that we are short of houses?

Charles, Bath, UK

Prices will fall - interest rate rises and price rises mean that the monthly repayments on a new mortgage are now at a level close to the 1990 peak - particularly factoring in that at that time MIRAS made repayments artificially lower.

It is now cheaper to rent than to buy in many parts of the country, even including only the interest part of the mortgage. As a consequence, buy to letters are now in negative cashflow, and relying for their profit only on selling to a bigger fool later. A classic pyramid scheme. Once prices stagnate, they will sell up, triggering real falls, especially as (with higher interest rates) they can put their money in a more secure investment and make a tidy sum.

John, London,

Oh come off it ! This article could have been written in any year since the 70s. The "Its all Blair's fault" spin on it is utter nonsense.

Also don't get me started on the "misery" of 5.5% interest rates. I recall 12- 13% in the 80s though I expect Mr Harding probably blames labour for that too.

Pete, Edinburgh,

It is supply and demand. So long as there are more people than houses the trend will continue. The only way to cure the problem is to reduce and control the levels of population. We are overcrowded and the population is rising too fast. It is causing problems with housing, water, roads, schools, NHS etc etc.
Building more houses is not the answer. This does not reduce prices it just slows the rise. In order to reduce prices houses would have to increase in number faster than the rise in poulation. This is not rocket science.
No government has yet talked about reducing our numbers but all have said they will increase by another 20 million in a few decades.

David Thijm, Stourbridge, UK

Liar's Poker......he lost !

TomTom, Leeds, England

Some interesting points James but why would house prices go up all over the country if it were all driven by the London boom?. The basic economics here are that demand outstrips supply everywhere. There simply arn't enough houses or they're being bought by buy-to-let investors, where your reasons point to low interest rates, as correctly being the cause here. Darren's point of changing the tax system in these cases is a fair point but at 5.5% interest rates this market will fall away anyway. However, this is not sufficient enough, in my opinion to effect prices as slack is taken up by firct time buyers.
The only way to dappen house price inflation is to build many more houses or lift interest rates to the point where repayments are beyond affordability for first time buyers. (thats not going to happen) barring a shock, i think we can expect prices to continue at about 10% a year for a while yet.

Richard, Leeds,

The current buy to rent activity is a rotten business that benefits only greed. The Government is criticised rightly for its low opinion of married life, seemingly has no admiration for that state that calms the savage brow, brings stability to relationships and creates circles of obligation in general society. If people cannot get a house, the basic currency of familial relationships, then we have an inherent instability right at the core of communities from which many ills spread. Buy to rent is the worst form of insider trading, a cartel. When all the build of new properties is already pledged, when properties are kept off the market awaiting price accrual, there are bound to be property shortages. When there is so much money chasing a diminishing supply the idea of ‘affordable homes' is but a dream; they will be bought en masse by the market and held onto until they are no longer affordable. But essentially, is it not dispiriting that there is a trade in homes?

Malcolm Turner, Alsager, England

it was no different in 1997, and again 1989 (remember the slump and the negative equity. Not Mr Blair's fault. Mr Lawson and Mr Lamont started it.

Let's face it -theBritish don't save anymore and expect to be in debt. I work in Brussels and am surrounded by nationalities like the Germans and the Dutch who would never stop to fritter money away on Starbucks, take out repayment only mortgages after they have saved for a huge deposit and then pay them off in 15 years. At 50 most of my colleagues are mortgage free. A bit like the UK used to be.

L, Brussels,

The opportunity to live and work in Europe means that as relatively normal professional (without a bonus bomb) I can afford to buy a family house within my income borrowing boundaries. Why would I want to live in Blairs Brittan? The wages were terrible and the next step on the property ladder was a wicky-up. The shortage of quality housing or housing development sites in locations where people can enjoy traveling to work, with good schooling has all but disappeared. The strain on the middle-classes is huge. Those less well of are struggling to afford cigarettes.
Buy to Let no longer offers the return and with higher interest rates, the trade between loss of profit for a secure 90-day account, or other such delight, should help ease the situation.
It will be a remarkable situation for any banking institution or government who can control the reduction in house prices. Brown or Blue but whoever must put a stop to this ridiculous housing market for the good of its entire people.

Simon, Bremen, Germany

Congratulations to James Harding for such an accurate and timely assessment of the current house price insanity. Until a more sensible tax is imposed on those who profit so highly from buy-to-let, we will continue on a path that sees a huge social divide widening in Britain based on house ownership. Social studies, as well as recent history, have shown that the bigger the divisions in a society, the more severe the social problems these produce. The housing divide is all the more worrying because it is founded, to put it quite brutally, on the predation of the (relatively) rich upon the (relatively) poor.

Darren Ross, Sunderland, County Durham

The main reason for the gap between house prices and income growth are much too low interest rates and exorbitant money supply growth over a long period of time because of underreported inflation(through substitution, hedonic indexing, replacement of old RPI-same in the US, see shadowstats.com) and a restriction of currency competition beacuse of the Euro introduction, and the common believe in these figures by the financial,political and media establishment driven by the benefits they derive from it and/or incompetence.
In addition, the UK boom was and is primarily driven by the London boom, in itself mainly driven by London's status as the worlds biggest tax haven and the unwillingness of the Uk and incompetence of continental European governments to tackle it.

J.Beringer, London, UK

The reason that housing prices are so inflated in London and the South East is the tax concession for foreign domiciled residents. In the past the influx of wealthy paying no tax was considered desirable because of the amount spent in the UK. We are now seeing the social cost of this. It is not just the superrich. Even those of moderate wealth can live in the UK and escape the punitive taxes of say France or Germany and they obviously find it worthwhile to pay inflated prices for UK property. It is time to end this anomaly and I suspect Gordon Brown thinks likewise.

Colin Grant, Westmount, Quebec, Canada