Should we Worry About Falling House Prices?

A recent survey suggested that a majority of UK citizens actually welcomed falling house prices. Are falling house prices a good thing or should they be a cause for concern, requiring government intervention?

Reasons to Be Concerned about Falling Prices

1. Negative Wealth Effect. Falling house prices cause a decline in household wealth. This leads to lower consumer confidence and prevents people spending through equity withdrawal. The recent decline in prices have cause a big fall in confidence and led to significantly lower growth. Thus falling house prices can be a trigger that could precipitate a recession in the UK. This would create a negative downward spiral, with rising unemployment further contributing to falling demand for houses and falling demand for house prices.

• Housing is a big % of wealth and it is important barometer of economic well being; therefore the effect is likely to be significant.
• Some may say falling house prices will make first time buyers better off and therefore they can spend more. However, this group represents a small % of the economy. 78% of homes are already owned.

However, it is not guaranteed that falling house prices will cause a recession. For example, the recent devaluation in the pound will help boost exports. In America, they have sought to avoid a housing slump turning into  a wider economic slowdown through expansionary fiscal policy (tax cuts) and monetary policy (interest rate cuts)

2. The MPC have little Room for manoeuvre. Recent statistics show inflation is rising; this is due to rising cost push factors - energy and food. Therefore, because of rising inflation, the MPC will struggle to cut interest rates to boost the housing sector and economic growth.

3. Negative Equity. It is estimate that if house prices fall by 30%, 20% of mortgages could lead to negative equity. This presents a real headache for many recent home-buyers and will act as a disincentive for people to enter the housing market.

Benefits of Falling Prices

1. Increases Affordability.

Many first time buyers have been priced out of the market by prices rising faster than not just inflation but also average incomes. This will help to reduce inequality between young people and older generations who have benefitted from rising house prices.

2. Inevitable Anyway

The correction in prices is inevitable given the present unaffordability of housing. However, long term forecasts for house prices suggest that actually prices may continue to rise faster than incomes in the future.

3. Increased flexibility of Labour market.

High house prices have contributed to geographical immobilities and difficulties in attracting sufficient quantities of labour in certain parts of the country. Lower house prices could make it easier to attract key public sector workers such as nurses, teachers and doctors.

Also, it depends how much and how quickly house prices are set to fall. A moderate and gentle fall in prices will not be so significant