Government Policies and House Prices

By Tejvan R Pettinger on January 30, 2009 in UK housing market

Readers Question: Do government policies make any difference to house prices?

Governments could try to influence house prices, but, they have generally been unsuccessful. Also the MPC set interest rates. The government no longer controls interest rates but interest rates could have an impact on house prices

To moderate house price rises they could:

Place higher stamp duty
Place restrictions on buying second homes
Make banks save a bigger ratio of deposits (ration credit and mortgages)
The MPC could raise interest rates.
Build More houses.

The government are in a way trying to prevent house prices falling by:

Bailing out banks and encouraging them to lend e.g. RBS, Northern Rock e.t.c
The MPC is drastically cutting interest rates to make borrowing cheaper. The government is putting pressure on the banks to pass these rate cuts on.
Reduction in VAT and increased spending, could limit the extent of the recession.

However, at the moment, government policies are not preventing house prices falling and it is difficult to see any policy which could effectively prevent house price falls in the current economic crisis. The problem is that there is a very powerful negative momentum in house prices, people think they are overvalued and banks don’t want to lend. So whatever government says or tries to do, it doesn’t make any difference.

The only policy which really would have stabilised house prices would be better stabilising of the credit boom and bust. If the government had forced banks to save more and ration credit in the boom, the boom would have been less and banks would now have more resources to maintain lending in the current downturn.

So, no the government can’t really stop house prices falling. But, they should find much better policies to prevent a repeat of the boom and bust we have experienced twice in the past 17 years.