Lehman Brothers, the US investment bank, have been running their slide rule over the UK economy and coming up with their view for the coming two years.  Amongst a number of predictions, they have come up with an implausibly precise figure of 8% for the size of the drop in house prices.  These organisations are never shy of revising their figures as they are proved wrong but they serve the purpose of gaining column inches and provoke a discussion.

It did get me wondering about the real impact that this would have on most people and, in truth, it would probably be none at all.  I doubt that many people could value their home to within 8% of what someone would be prepared to pay so the real impact on wealth should be minimal.  We will lose something we did not know for certain that we had.

Looking back to the early Nineties, which is the most often quoted property slump, values dropped in nominal terms by 10%, although more in real terms.  Now, if you are sitting in a house worth, say, £300,000 and over the next two years its value drops to £270,000, so what?  It does not impact on the property’s primary purpose which is to keep you warm, dry and secure.  In another ten years, it may be worth £500,000, hardly a blow from which most cannot recover.  So why are we worried? 

In truth, it is because we are not rational creatures, particularly when it comes to investment, and we are least rational about property.  Changes in the value of our home, or flat on the Costa del Sol, affect our mood to a large extent.  If our home rises in value, we feel rich, even though it means that the next property on the ladder has risen by more money, making it harder to buy.

Also, marginal buyers suffer disproportionately.  Those who put down a small deposit may lose it all or worse, may owe more than the property is worth.  People’s mobility is affected.  People spend less when they move less frequently which impacts upon real businesses and jobs.

So, it is a worry but asset values cannot increase continuously without distortions affecting the market.  Periodic shakeouts are a necessity, however unwelcome, to introduce a degree of sanity and remove anomalies.  All property rose in value for no reason than we were rushing to invest in property.  It was, in part, down to speculation as amateur property developers spurred on by TV programmes tried to get rich quick.  Some did and now we will endure a coupleof years of discomfort.  History tells us not to be too pessimistic, though, as those who hold tight will tend to see it come right in the end.