UK house prices are way out of line. It's a bubble, it's distorting the economy and is one of the underlying elements in the financial crisis. Banks whose assets include IOUs on houses are not going to get all their money back. For that reason their assets are worth less than was thought by optimists during the bubble. It's going to get worse before it gets better: people are going to default, banks are going to have to face up to reality, sellers are going to have to face the fact that people are not going to pay five times their salary for a place to live and so on.
Yet the government seems determined to keep the bubble inflated. It appears to be insisting that the two newest branches of the government, HBOS and RBS, keep lending at 2007 levels, i.e. too much. I can understand that you'd want to "smooth" the house price crash, and I hope this is what they have in mind, but it looks awfully like a desperate attempt to keep the bubble going.
Newsnight had a couple of house price cheerleaders on last night: an estate agent and some guy who wrote a book called "How to make a million in housing" or something like that. And these guys of course are gung ho about the housing business being the backbone of the economy and so forth. The presenter asks a perfectly reasonable question: why not follow other countries which have long imposed fairly hard rules on how much you can borrow (effectively as a damper on bubble formation)? Guests just ignored the question and keep shaking their pom poms. What a joke. This is like asking thieves about preventing robberies. Meanwhile Yvette Cooper refused to even say that there's something wrong with 125% mortgages.
House prices will drop. It's only a questio of how long psychology and government intervention keeps them artificially high and how much broader economic damage is caused in the meantime.