Why property prices don't always add up

EACH day brings a different opinion on what is happening to house prices. The major surveys suggest they are marching on regardless of interest rate rises, and the Governor of the Bank of England adds fuel to this with his warnings of the risk that buyers at these levels may see the market move against them.

But more and more estate agents and building societies with interests in estate agents report that buying interest is cooling and more properties are coming on to the market as potential sellers move to capture what they fear might be the last of the buoyancy. They see definite signs that the market is turning.

At times like this the best guidance often comes from people who have to put their money where their mouths are - the housebuilders.

For months, the Government has been urging housebuilders to increase output to relieve Britain's shortage of affordable housing. A major housebuilder, Berkeley, has responded - but by doing exactly the opposite. It plans to shrink by reducing output and returning most of its capital to shareholders.

Actually, it makes a lot of sense. Britain has a shortage of affordable housing but the addressable market for housebuilders is well-supplied. The supply of affordable housing, whether to buy or to rent, is largely a function of the subsidy provided by Government. Britain's private sector has never supplied affordable homes in the quantities needed because too many people do not earn enough to be able to buy even the most basic accommodation.

That is why in the three decades before the Thatcher era, half the new homes built in Britain every year were council houses for let by local authorities on subsidised rents. It is nonsense to think the private sector can take the place of public sector housing without subsidy.

Berkeley's action is only the most dramatic example of the mismatch between what the private housebuilders say is happening to house prices and the message from widely followed surveys by Halifax, Nationwide and the Deputy Prime Minister's office.

While most have reported prices up 10% or more on 2003, several smaller housebuilders have put the rise at between 0% and 10%, with top-end prices falling.

Housebuilders are making genuine like-for-like comparisons. Halifax/Nationwide data comes from mortgage approvals and can be distorted by change of mix - for example, if the proportion of expensive houses in the total increases, prices will seem to rise.

The recognised shortage of first-time buyers who obviously go for cheaper homes underlines this effect.

New houses tend to be left out of Halifax/ Nationwide data but builders of new homes have to be totally plugged into what is happening so they can set their own prices at appropriate levels.

If house prices really are slowing, the market may be too pessimistic about the upward path of interest rates. It might also help if it was more widely recognised that the 'overheatingî of the domestic economy is not caused by house prices but by excessive Government spending. High interest rates will not stop that.

Unbrotherly

THE petty feuds and half-baked philosophy on TV's Big Brother may not appeal, but Colin Byrne, boss of PR firm Weber Shandwick, suggests we should look at it in a new light.

In a letter to the Financial Times he says the goings-on in the Big Brother house remind him of the intrigue, duplicity and struggling for position he sees all the time at the top of companies and in political life at Westminster - or presumably in the goings-on of an investment bank or finance house.

Big Brother, he says, is a study in naked alliance-building in order to survive and constant adaptation of strategies to meet new and often unexpected circumstances.

The individuals' upfront tactics and secret motives are no more moronic than countless management textbooks, team awaydays and classic works on power such as The Art of War.

When the Higgs Report was published, a highly experienced management consultant remarked that none of the corporate governance codes recognised that company boardrooms were intensely political and the decisions boards took always reflected power struggles and personalities rather than any objective judgment about the needs of the company.

Codes gloss over this because they are written by successful executives who have a vested interest in playing down the importance of corporate politics and duplicity in their rise to the top.

Byrne underlines an important point. If we want to understand how business behaves we should never forget that companies are run by usually quite ordinary people.