1. Wealth effect.
Rising house prices increases the wealth of home owners. They can re-mortgage their house in order to get equity to spend. Also higher house prices will increase consumer confidence. Therefore, rising house prices are associated with higher levels of consumer spending and therefore higher AD. This in turn leads to increased economic growth.
2. Housing is Biggest form of wealth
Rising house prices are important because they are the biggest cause of wealth in the UK. In the UK 75% of homeowners own their own house.
3. Inflationary Pressures
Rising house prices could contribute to inflation. This is because the rising wealth causes a rise in consumer spending. However, if there is spare capacity in the economy then this will not occur. Also, it depends on other components of AD and economic growth. For example in the UK the £ is currently strong, therefore exports are lower. This helps to reduce inflationary pressures.
4. Multiplier Effect
Any changes in house prices may cause a positive multiplier effect. This means a rise in AD leads to a bigger final increase in AD.
5. Shortage of Affordable Housing.
They can make houses very expensive for first time buyers. Some people may not be able to get on property ladder. This is a problem particularly in certain areas like London, where house prices are very high. Therefore there is often a shortage of key public sector workers in areas such as London.
6. Increases price of Renting
Rising house prices tend to also increase the price of renting. This is because rising house prices encourage people to rent. It contributes to rising inequality between home owners and those who rent.
7. Increases Debt
It increases the level of debt in the economy because consumers are more willing and more able to borrow against the value of their houses. In turn this makes the economy more sensitive to changes in interest rate
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