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House Prices, Burgers And Buffett

By Cliff D'Arcy | 2 May 2008
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First things first: I sold my family home in the spring of 2005 and have been renting for three years. So, can you guess what I want to happen to future house prices? Yes, you're absolutely right: I want them to fall, preferably by a huge percentage!

House-price heresy?

Ideally, I'd like house prices to halve (fall 50%), although I don't expect this to happen in my lifetime. On the other hand, pessimistic pundits (including the International Monetary Fund) reckon that prices could fall by up to 30% from their peak, which would suit me nicely.

"Heretic! Heathen! Unbeliever!" I hear you cry. Of course, my position puts me at odds with the seven out of ten Brits (70%) who own their own homes. Then again, the big question is why do the UK's 17.5 million owner-occupiers want house prices to keep rising relentlessly?

My argument today is simple: I believe that it is illogical and counter-intuitive for British homeowners to want house prices to keep rising year after year after year. In order to support my theory, I'm going to rely on some wise words from the world's richest man, billionaire investor Warren Buffett.

Buffett on burgers

When discussing the future direction of share prices, Buffett put forward an amazingly simple argument. If you want to buy hamburgers tomorrow, should you wish for the price of burgers to fall or rise before you buy? Of course, the logical response is to hope for lower prices, which enable you to buy more burgers for your buck. On the other hand, if you plan on selling burgers tomorrow, then you should hope for higher prices.

Houses are much the same as burgers

The same analogy applies when thinking about your future consumption of housing. If you're a first-time buyer, then you want prices to fall before you enter the market and leap on the housing ladder. It comes as no surprise to learn that most first-time buyers join me in praying for a sharp fall in house prices.

Likewise, if you're planning to move to a larger property, then it makes sense also to wish for lower prices. Although the value of your current property will fall, so too will prices further up the ladder. In most cases, the larger property's value will fall by more than you lose on your existing property. Thus, you end up a winner when prices eventually fall.

The logical approach to house prices

As you can see, this is a very simple concept to grasp. If you want to increase your stake in the housing market at any point in the future, then it's in your interests for prices to fall between now and then. Likewise, if you plan to move to a larger house or invest in property, then rising prices are to your benefit. Alternatively, if you are a property investor and aim to sell part of (or your entire) portfolio in the future, then steeply rising prices are right up your street.

However, for most Britons (myself included), it makes sense to wish for lower future house prices. That's because we don't plan to live in the same house until we die (or sell and move into a smaller or retirement home). Thus, because we have plans to reach for a higher rung on the housing ladder, we should welcome falling prices.

In summary, falling house prices benefit many millions of people. Indeed, it's possible that there will be more winners from a housing crash then there will be losers. This is simply because very few of us are in the final stretch of the home-owning race.

Indeed, some of the biggest winners from the housing boom are older homeowners, who have seen massive increases in the value of their properties. This housing equity can be released when they sell up and downsize to smaller properties, and used to boost their retirement incomes.

For most of us, lower prices are good news

For the rest of us, those holding onto lower rungs of the property ladder and non-owners, a housing crash will come as a blessed relief. It will enable us to buy more property for our pound, or pay a lower price for a home which we already have an eye on. Thus, we should welcome the news from the Halifax that house prices fell 2.5% in March and a further 1.3% in April.

For the record, Halifax, the UK's largest mortgage lender, reported that the average house price has fallen 3.7% in the past twelve months. In April 2007, it was £196,262; today, it stands at £189,027, a fall of £7,235, or around £20 a day. This is the first yearly fall recorded by the Halifax House Price Index since 1996, marking the end of a twelve-year winning streak.

If this news leaves you feeling a little depressed, then stop and think for a moment. If you plan on increasing your share of the housing market in future, then falling house prices should be greeted with glee. Then again, if you plan on selling up or downsizing, then the forthcoming downturn in the UK property market brings nothing but bad news for you. (Unless you do as I did by selling up and aiming to buy after prices have fallen.)

As with everything in life, there will be winners and losers in the housing crash. However, in my view, it's a good thing that the British obsession with house prices is due to come to an end. After a few years of falls, normality will be restored, and we can go back to viewing houses as homes rather than money-making machines!

More: Find money-saving mortgages via the Fool | Why House Prices Must Fall | When Debt Brings Down The House