Economics and house prices

"Speculation begins when a price is going up and the presumptively wise expect a further increase. They buy and thus produced the increase. More buy, and more and yet more are attracted. Each price increase affirms the good sense of those who have bought before. Those who doubt are reviled as creatures of defective imagination. The buying and the supporting mood continue until the available supply of mentally vulnerable, economically viable buyers is exhausted. Then come the changed views of the prospect, the rush to get out, the pressure now of creditors demanding repayment of the loans that financed purchase, thus forcing sale. In short, the crash."

So wrote John Kenneth Galbraith in his book "In a Journey Through Economic Time" in which he described the warning signs that led up to the crash of 1929.


A shorter more pithy quotation from 1929 that is, so far as I know, unattributed was "When the lift boy says buy, it’s time to sell".


The economic crash isn't coming, it's here. Achieved house prices are already falling and "For Sale" prices will follow them down. I see a 30% drop in real terms of house prices over the next two to three years and prices not to recover to 2006 levels for at least 10 years. This is fine if you expect to keep your house for 10 or more years but some of you may want to move house and that is where the pain will be felt. The media, especially the BBC, love to talk about the problems of "first time buyers getting onto the housing ladder". However it is those who scrimped and saved to get onto that ladder over the last few years who will be amongst those who suffer the most in this crash and their anger will be real. Don't forget that just because someone doesn't move house but stays where they are, all the time property prices are down they will be paying their mortgage on the amount they originally borrowed. When that amount becomes too much to bear and they can't sell the house because they are now in a position of negative equity, then what? What about those people who have borrowed money on the rise in value of their house, that may not look such a clever move soon.