Housing is not like anything else in economics. It is governed by different economic rules than apply elsewhere. That, at least, is the conclusion to be drawn from what economic commentators and politicians say about it. With other things, it is good when they become less expensive. In housing, it is good when prices go up. But this makes less sense when you start to ask why it is so.

The latest high-tech multi-function gadget will be launched at a price that trend-setters alone will pay, but before long it or its imitators become more accessible, the price plunging both in face value and in real terms. Many commonplace items also become cheaper over time. Few disagree that this tendency is a good thing – except when it comes to housing.

The Halifax has reported that house prices have fallen by 15 per cent in the year to October.[1] Commentators nearly universally take this as major bad news for the economy. It is admitted in passing that first time buyers could benefit from this, but that said to be outweighed by wider considerations.

Of course, reasons why housing is an exception can readily be given. It is a piece of solid wealth standing against future uncertainties. Maintaining a mortgage enables people to stabilise the overall size of their outgoings for living accommodation. It is important to do this because, as a general trend over the medium and long term, the cost of homes keeps going up.

This is key to the economics of housing. Property values tend to rise, but the reason they tend to rise is that there is a scarcity of housing. Some 100,000 households are officially accepted by local authorities as homeless each year.[2]  In 2007 only 160,000 new homes were built in England, whereas the government’s target is for 223,000 per year.[3]

Stagnation rather then on-going price falls arises from the current finance shortage because sellers must escape negative equity caused by over-priced housing, in turn caused by the shortage of supply.

A vibrant housing market, reflected in rising prices, is also said to be good for the economy because it generates spending on furnishings, plumbers and carpenters. This would also take place, however, if house sales were buoyant due to an on-going fall in the real-terms price of housing, which would happen if there were not a scarcity of it.

It is, in fact, a completely unnecessary scarcity. If a modern advanced economy like Britain’s can readily supply the range of material goods that a modern way of life requires, from shelter and food to high-tech gadgets, then it is hard to see why it cannot supply enough of something so comparatively pre-modern and low-tech as a decent home to live in.

Key to getting out of the housing tangle is to build a lot more of it.

Acquiring a house or flat to live in, whether purchased or rented, will inevitably be a major economic transaction for most people. But there is no reason why it need be such a large transaction that it distorts the whole pattern of a person’s decisions about where they live and how they earn a living. If housing were not scarce it would be much cheaper and become more so as time went on. It would be just one among other major purchases that we need to make. It would be easier to change jobs or to embark upon a new form of work. Our wealth would then lie in the wealth of possibilities offered by more flexible patterns of life.

It is time to drop our illusory view of rising property prices as a talismanic marker of economic health. The government needs to start treating housing as something  which plays such a key strategic role in the economy that, while remaining largely in private hands, it must be overseen by government as a quasi-public service. The government should set about taking out for itself the loans necessary to commission an extensive new house-building programme. These funds it would before long start to recoup as rent or re-sales.

Such strategic government action to lessen the distorting effects of housing on the economy would operate as a fiscal stimulus against the unfolding recession by combating unemployment, in a context where Britain’s brick makers have laid off more than 1200 workers [4] in the current downturn and the major builder Taylor Wimpey has cut 1,900 jobs since the summer.[5]

Housing associations, using government assistance, are already taking the lead. They built 56 per cent more homes in the summer quarter this year than in summer 2007, while private sales collapsed.[6] The market alone cannot bring about affordable decent homes. The scale of the problem, in housing and for the wider economy, demands pro-active government intervention.

[1] http://www.guardian.co.uk/money/2008/nov/07/house-prices-fall
[2] http://www.housing.org.uk/default.aspx?tabid=496
[3] http://www.hbf.co.uk/Fact-Bank-8a256fe
[4] http://www.guardian.co.uk/business/2008/nov/13/construction-recession-brickmakers-hanson
[5] http://www.guardian.co.uk/business/2008/nov/12/recession-taylorwimpey
[6] http://www.guardian.co.uk/business/2008/aug/22/construction.housingmarket