We regularly see headlines equating falling house prices to bad news. - Gloom in the housing market, House price collapse, housing slump slump.
From a casual glance at newspaper headlines it appears that the UK is heading for a Great Depressions style economic disaster. But, how bad are falling house prices?
Falling house prices are very damaging for those who bought at the peak (July 2007) and also face difficulty meeting mortgage repayments. Unemployment is likely to rise in the next months. Those made unemployed will struggle to pay mortgage repayments and will face negative equity. It is a toxic combination.
However for the majority of homeowners falling house prices is not the end of the world. If you want to move, falling house prices do not affect you that much. True, you will get less for your house, but, if you want to buy it will be cheaper as well. This housing slump is different to the last housing crash in that interest rates are low (4.75% as opposed to over 11%). As the economy declines, interest rates are likely to remain low. Yes, house prices are falling, but, the cost of mortgage payments is not going up significantly.
Most homeowners are still sitting on huge equity gains. House prices have fallen £15,000 since last year. But, if you bought a house in early 2000, you still would have made nearly £100,000 profit. (Historical house prices) Even if you bought in early 2006, your house has still not fallen in value (at least in most areas)
Affordability.
The fact house prices rose so much faster than both inflation and earnings meant first time buyers faced great difficulty in getting on the property ladder. Lower house prices make it more feasible for young people to buy a house without getting unconventional, risky and expensive mortgages. Falling house prices will also help reduce the intergenerational inequality which increased in the past decade.
True, first time buyers now face a new problem of getting mortgages. But, when the mortgage industry stabilises, buying a house will be more feasible.
Other problems with falling house prices
The other downside of falling house prices is that it will lead to lower consumers spending and lower consumer confidence. Combined with increased living costs, it is a potent mix of negative news for the economy.
2 comments ↓
Guess, there are more positive than negative sides in falling house prices at least for young people. They have more chances to buy a house not burdening themselves with credit.
certainly i do agree with you Emmier
there are more chances for the younger people to buy houses and stay far from all these credit hassels.
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