Problem With Falling House Prices

House prices continue to fall amidst sluggish property sales. The dynamics of the market mean that falling house prices create a powerful negative momentum for both the economy and housing market.

Lenders don’t want to lend With falling house prices.

When prices are rising, mortgage loans of 95% value make sense. However, when prices are falling they don’t make any sense. Householders buying on 95% mortgages will soon face negative equity. With home repossessions rising, banks could be left with high debts and losses. Therefore, despite government pleas to offer more mortgages, banks are understandably trying to protect their battered balance sheets and requiring large deposits.

The number of mortgages requiring more than 25% deposit has risen from 54% to 60%. Therefore, although property prices are falling, the deposit required has been rising – hence the improvement in affordability is illusory for a nation that has a very low saving ratio.

People Don’t Want To buy.

When house prices are falling at 15%, and most economists predict further falls of 15-20% where is the incentive to buy? People are choosing the common sense approach to rent rather than buying. This is causing a further fall in demand. When house prices rise, speculative demand increase. When prices fall, demand evaporates. House prices are now in their 3rd year of decline in the US.

House Prices and Economy.

The current recession shows the importance of housing to the wider economy. There are other factors at work, but, falling house prices is definitely having a significant negative effect on consumer wealth and consumer confidence. This is causing the fall in consumer spending which is leading to retail giants going bust and rising unemployment. But, as unemployment rises, repossession rates will rise and people will be nervous to buy. Therefore, the recession causes further declines in house prices.

Bank Balance Sheets

In the credit boom years of 2001-2007, banks were highly leveraged, they lent a high % of their deposits. – especially former building societies like Northern Rock and Bradford & Bingley. This means they are reluctant to lend. But, falling house prices will worsen the financial state of the major banks meaning lending conditions could get worse before they get better.

Falling tax Revenue.

A relatively minor problem, but still a headache for the government. Falling property prices are having a very negative impact on revenue from stamp duty, leading to lower revenues.

Problems for Estate Agents and Construction sector

The recession is affecting all sectors, but estate agents and the constrution sector are particularly affected. It is causing job losses in these sectors. It means that very few houses are being built, exacerbating the long term problem of a housing shortage in the UK.

• Why House prices are falling