With house prices falling so rapidly and the economy plunging into recession, it is not a surprise many make the link between house prices and consumer spending.
I was surprised to come accross a report by a former member of the MPC, claiming there was practically no link between house prices and consumer spending / economic growth.
His logic was that, although some people lose out from falling house prices, others (first time buyers) gain from falling house prices. Overall, this leads to a neutral outcome.
However, I feel this is wrong. House prices are so important to the UK consumer, they impact upon our mindset and confidence. Also equity withdrawal become an important determinant of consumer spending by 2006. With house prices falling, and negative equity - equity withdrawal has dried up.
You can see the full article on my economics Blog - Affect of housing on economy
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There are hundreds of industries that have made fortunes on the back of remortgages and equity withdrawal.
You wouldn’t believe the amount of people I’ve met who bought their house from the council for, say, £35000 but now owe more than £100,000 on it. Generally this cash has went on home improvements, holidays and cars. These industries will be hit the most by the house price decline. Also - watch the birth rate slow up as people decide against having more kids.
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