Why is borrowing so cheap ? Interest rates were due to go up post the dot.com bubble. Then Bin Laden struck the Twin Towers and the Fed decided to keep them low in order to avoid a global economic crisis. It is no coincidence that the housing boom really took off after 2000.

3.5% because if interest rates go up (as they should) then the mortgage will remain affordable to borrowers. This figure was decided by steady Capt Mainwaring types before 30 year-old spivs infested the lending system and brought us to the verge of bankruptcy.

I’m neither an expert on house prices or economic policy, but from a purely common sense point oof view I would say the average house price should be no more than 3.5 times the average (not professional) salary given that is the usually accepted maximum a mortgage lender would consider affordable. I don’t think that is “shrill” or “world-hating” – just common sense.

So, assuming the average salary is around £25K a year that would mean the average house should cost no more than £90-100K (depending on deposit and the spousal salary). That is what the “correct level” of house price should be – you may not agree, but at least someone has answered your question now. Lending more than 3.5 times salary had become commonplace, but – as we saw – this leads to a credit bubble and, ultimately, a credit crunch.

You also have to bear in mind that house prices in the UK are bound to be over-inflated purely due to the sheer pressure of numbers on the housing market and because it is a highly regulated market there are bound to be market distortions. If the market were free – i.e. you just let people build anything anywhere – then the “correct” house price would be considerably lower. In other words, if the market were less “orderly” then prices would be lower.

As a result, house prices are not a reliable economic indicator – but they do serve as a very good indicator of levels of personal debt and a reminder of the dangers of debt. I really don’t like this “I’m alright, Jack” attitude. I’ve got kids and I’d like to think that – if they want to – they would be able to afford to live where they were brought up, but at current rates that just will not be possible.

Calamatist/EK – why would I sell a flat which I like living in?

L – I expect the land is worth rather more than that by virtue of it being land available for housing. You can’t just buy a couple of acres of field and build a house. My flat apparently would cost half what I paid for it to be re-built, but the land it is on must be worth a fortune even at recession prices.

David – well that was pretty much my point, there are lots of shrill world-haters who think that there should be a nice orderly housing market where nothing ever costs more than 3.5x a professional’s income and price inflation was faster than interest rates so they could pay off their mortgages quickly a bit like in the 1970s when everything was wonderful in Britain.

I’m sure you realise this but nothing has an intrinsic worth or value. Not gold or silver or oil or AK47′s or your labour. The value of things (all things) is soley determined by what you can exchange them for in real markets which you can access.

So houses are worth what you can get them for or sell them for.

When people speak of markets under or over pricing something they are really speaking about wishes or desires not observable reality.

Actually expectations have been going down for some while now. A city professional will pay 1/2 a mil for a tiny property that a milkman would have taken for granted thirty years ago.

Times your salary by 3.5. Deduct this sum from the mortgage which you were allowed to take out. The is the amount by which your loan exceeds acceptable amounts and from this you should be able to calculate how much your home is over-valued.

You mention the fact that each of us needs our own room etc. This is an indication of how far demand for property – therefore prices – can contract should we all revert to 1940s austerity living. I don’t mean to be a doom monger – but I think we are in the eye of a hurricane and that the ‘worst financial crisis since the war’ has not passed us by with a mere blowing over of a few deck chairs.

Another commenter puts it thus:

All that’s happening is that the Government has taken over from the general public as the major new borrower, and is busily using financial trickery to try to re-inflate the housing market (which is proof if proof were needed that Labour ministers know pretty much zilch about anything much).

This mega-pumping of new money is certain to have an effect, and the effect is what you see; a minor blip in the market that occurs in the most messed-about-with, most distorted and most unrealistic section of the market, i.e. London.

This is just a blip. The next big upset will come when the rating of UK Government Bonds drops, and the insane borrowing party comes to an end. At that point a lot of the money in the economy will vanish, as the financial firehose aimed at the recipients of benefits gets turned off.

My guess is that the adjustment period that will follow this will be painful and will force a lot of people to ditch illusory wealth and live with what they have, which will mean a lot of property suddenly comes onto the market at knock-down prices.

I hope this doesn’t seem too personal but your piece gave the impression that the recent volatility had been causing you distress. While increased volatility will periodically provide opportunities for rebalancing from overvalued to undervalued assets, “phew” (or any other significant emotional response, positive or negative) is a warning sign; it’s not something one should feel about a portfolio that’s appropriately diversified and not overleveraged. Wondering if you could be in too deep? Or maybe it’s an unrealistic wish for perfect financial foresight, which none of us has; even some of those Austrians and goldbugs will be nursing large losses at the moment if they invested heavily in junior miners.