Economy offers Little Hope for Housing Market

Despite the frantic efforts of the government’s economic stimulus package, recovery in the housing market will still be a long way off. The UK economy in 2009, is likely to be characterised by rising unemployment, national debt and falling economic growth.

The recent economic stimulus package offers tax cuts, most notably VAT cut to 15%. However, the impact on economic growth may be muted to the continued credit crunch and low consumer confidence. Recent reports from the BBA suggested that mortgage lending in 2009 could be negative - i.e. the banks could be drawing in more repayments than giving out in new mortgages [BBC link]

Economic stimulus packages tend to have a time lag. With lower saving rates and high levels of borrowing, the tax cuts may not be sufficient to encourage an increase in spending

Also the tax cuts might discourage the MPC from cutting interest rates as the prospect of deflation diminishes with expansionary fiscal policy

National Debt is forecast to rise sharply over the next few years, as the triple effect of:

• recession (reducing tax revenues)
• Bank nationalisation and bank bailouts
• Tax cuts to try and boost economic growth

Even economic recovery may be insufficient to prevent house prices falling. Unemployment often lags behind the economic cycle. If the economy recovers in the second half of 2009, unemployment could still keep rising until 2010.