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doing so. In the late 1980s, in response to strong demand, Britain’s house-builders built thousands of tiny boxes and called them ‘starter homes’. Like flood-prone houses later, these subsequently became hard to sell. They became lemons.
    In general, though, second-hand houses do not suffer in this way. Even if they need money spent on them, as they usually do, and even if that involves more than what might have been revealed by the structural survey, which it usually does, buyers are not deterred, for two reasons. One is that, except in extreme circumstances, the cost of repairs and improvements usually represents only a small fraction of the cost (and therefore to the buyer the value) of the property. The second is that people are willing to spend money on their houses because they see this as maintaining or improving an asset that is going to go up in value. As an aside, a perennial debate in the property pages is whether you ever get back, in the eventual selling price of the house, what you have spent on double-glazing, a conservatory or a kitchen. In other words, does your house sell for a sufficient amount more than the unimproved property down the road? To an economist, that may be a sensible question for a property developer to ask himself, but it does not have a lot of relevance to the ordinary homeowner. This is because the gains from any improvements fall into two categories – the ‘consumption’ of those improvements in the form of more warmth, comfort or space, and the effect on the value of the property. Splitting the two is very difficult indeed, not least because it will vary according to individual preferences.
    While we are at it, let us nail another newspaper (and dinner party) favourite. Can you compare the rise in the price of your house and that of investments in the stock market? The answer is no, unless you have a way of valuing the non-financial benefits – warmth, shelter and so on – you have received from housing along the way, which share certificates do not offer. Not only that but, on the other side, most people do not take out a mortgage to buy stocks and shares (although they do forgo the interest they could have obtained from putting their cash in a deposit account). It is a case, though I hesitate to introduce more fresh produce into the discussion, of comparing apples and pears. Even for developers, the calculation is not easy. Most measures of long-run stock market performance assume that share dividends are not taken as income but reinvested. The equivalent for a landlord would be that rental income was immediately invested in additional properties, and the comparison would then be between the rise in the value of an entire property portfolio, not any single house, and that of the stock market.
    We have got this far without addressing a rather important question. People are prepared to spend money on their houses, not just because they want to live in more comfortable and spacious surroundings, but also because they think they are investing in an appreciating asset. History tells us that they are right to think that but it does not explain why.
    Why house prices rise
     
    One of the most enduring economic relationships is that between house prices and people’s incomes. House prices rise because incomes do. The house price/earnings ratio – the ratio of average house prices to national average earnings for full-time workers – is around 3.5 over the long run, usually fluctuating between three and four. If average earnings are £20,000 a year – they are actually a little bit above that at the time of writing – average house prices will be around £70,000. It is easy to see why this relationship should exist. Suppose house prices had not risen and were stuck at their 1930s level. Someone on average earnings could buy several houses in the London suburbs a year, instead of buying one and paying for it over the twenty-five years of a mortgage. We are back to supply and