There have always been paradoxes in the housing market. For instance, while people want the price of all other essentials items to fall homeowners want the value of their home – and by implication all homes – to rise, even if it would be to their disadvantage in cash terms should they wish to trade up.

But let’s not get bogged down here other than to say part of the explanation may be that houses are increasingly seen more as an investment than simply a place we pay to live in and they are mostly bought through a mortgage over time rather than outright.

The question here is whether the sharp 1.7% fall in average house prices announced today by Nationwide is good or bad.

Clearly it is good news for those looking to buy at this point. Clearly it is bad news for those looking to sell immediately.

But for the housing industry as a whole is it better to have a short sharp correction or a long drawn out readjustment in house prices to bring them better in balance with the fundamentals (this much talked of mysterious background set of economic variables)?

This is of course assuming in the first place that house prices are out of kilter with the fundamentals of the economy.

For my money house prices have been rapidly moving out of line with their normal long-term relationships with other economic variables since about 2002 to 2003.

Let’s just take a ratio of prices to earnings.

You can track back to the 1930s, when homeownership started to expand more rapidly, and find that house prices were about three times household earnings – although at the time there would most likely be just one breadwinner.

Comparing house prices with earnings more recently shows a rapid rise above trend in the early part of the decade. (for reference you can look at the Nationwide First Time Buyer Gross House Price to Earnings Ratios).

There appeared to be some closing of the gap and the possibility of a realignment occurring in early to mid 2005, but the drop in Bank of England interest rates in August appears to have sparked a new zeal in the market that prompted house prices to jump further out of line.

This jump above long-term trend was managed with much help from the relatively easy availability of relatively cheap money, which reduced the “short-term” affordability of houses.

But unless we assume that there has been a permanent marked shift in the value of houses as an asset class for some reason (demographics, wealth effects among many possible reasons), or we assume that money will remain permanently cheap (it certainly isn’t as cheap now as it was), we have to consider the likelihood that prices will return to a more “normal” relationship with the fundamentals.

What does returning to more normal relationships mean? Well, if we take the relationship of household income to house prices, it means either we wait for the growth in wages to catch up with house prices or we see house prices fall to match the level of earnings. But most likely we see both.

What is different now, than in the past, is that we live in a relatively low inflationary economy compared with previous periods when house prices corrected. In the early 70s they corrected rapidly by standing still (even rising slightly) against a background of rampant inflation.

But today a correction means we would have to wait a long time for wages to catch up with their long-term relationship with house prices and longer if the market (as markets so often do) bottoms out after an overshoot. I have seen plausible graphs in the recent past suggesting it would take nine years for prices to correct if they flatlined. It all depends on the assumptions you make. Although we can cut that time considerably given the 8.1% fall in prices from peak announced by Nationwide today.

Here’s dilemma. Do we want a fast correction and back to business as usual, with the uncertainty of the pain it will cause, or do we want a slow drawn out more gentle readjustment in house prices, which will mean activity in terms of transaction is likely to remain fairly subdued for a long period.

Of course, this is assuming that things are out of kilter.

But I am hearing more and more people, regarded as experts, quietly suggesting that, if we have to have a correction, shorter and sharper may be less corrosive for the housing industry as a whole in the long run. This of course may represent their particular vested interest, but knowing some of them I think not.

But with that faster correction must come the probability that nominal house prices will fall far more than they would if the process is more drawn out. That could be very painful indeed for those in negative equity and in the short term for house builders.

However, if you take that view that a correction is due and a short sharp one is better than a slow drawn out one then the Nationwide figures could be seen as good news.

There’s another paradox associated with house prices.