Falling house prices certainly create no shortage of newspaper headlines. Although some of these headlines can sound unnecessarily apocalyptic, falling house prices are not quite the end of the world. In fact falling house prices can be of benefit to some people.
Who Benefits from Falling House prices?
First time buyers. At the moment the ratio of house prices to incomes are very high, close to 5 times salary. Falling house prices will enable increased affordability. Also rising salaries and pricing can mean that real house prices will fall than more than nominal. If you are a first time buyer then waiting for a while can enable prices to become more affordable.
People wanting to buy bigger Houses. If your house price is falling in value, then it will also be cheaper to buy other houses. If you are wanting to trade up to a more expensive house, this will actually make it cheaper.
What Will Happen To Interest Rates?
The good thing about falling house prices is that the cost of mortgages will not increase. If anything falling house prices should encourage the MPC to cut interest rates. This is because lower house prices will contribute to lower growth and lower inflation. However, this is complicated because:
1) Due to credit crisis banks are not passing base rate cuts onto consumers
2) The economy faces cost push inflation, e.g. rising energy prices e.t.c.
Therefore, interest rates may not fall much, but, it won’t become more expensive to pay for a mortgage
The Dangers of Falling House Prices
The main problem of falling house prices is that it will lead to lower consumer spending and could threaten a recession like in 1992. This could lead to lower growth and higher unemployment.
Negative Equity. The other danger of falling house prices is for people who bought recently, especially those on 100% mortgages. With house prices falling, people could be left with a mortgage greater than the value of their house. However, negative equity is not necessarily a disaster. If you are able to keep living in your house and pay off your mortgage payments it will only be a paper loss. In the long term house prices are likely to recover.
If you find yourself in a situation of negative equity the best thing is to try and budget so that you are able to keep up with mortgage payments. Try reducing unnecessary expenditure, and look at ways of raising incomes.
How Much will house prices fall?
The biggest cause of falling house prices at the moment is the difficulty in getting a mortgage. It is the drop in mortgage approvals because of the credit crisis that is squeezing housing demand. The Bank of England have tried to inject money into the money markets. However, if this is overcome, then prices may fall less than some people expect. Interest rates are relatively low, supply is still constrained and there are many people who would like to get a mortgage. If you wait hoping for house prices to fall 30%, you may never get round to buying a house.
Surviving a recession at Economics Help
4 comments ↓
[...] Surviving a Housing Crash [...]
This is a well balanced and well thought out article. I feel it is important to highlight the advantages of falling house prices, as well as the disadvantages, as it is all too easy to get caught up in the media hysteria.
As a property investor, the advantage for me would undoubtedly be cheaper properties. However the difficulty comes in sourcing good mortgage deals. It’s now down to me to make the most of the situation by getting creative!
The fundamentals of the UK economy are all in very good shape. The house prices will not fall significantly over the next years. There is a temporary squeeze on mortgages. As soon as that is corrected the house prices will start rising again, however, at a slower pace than in recent years.
I agree with both Ana and Lorraine. This struggle will last for approx. 6 - 12 months in my opinion. There will always be supply and demand in the industry, sure prices have and are dropping slightly but lets not forget that they have been rising for a good 4 - 5 years, thats something that the media especially forget to mention. Prices will steady out, mortgages will slowly become more available and the market will slowly pick back up. I also believe that the media have made the situation much worse, bad news/reports about the market constantly being pushed into the publics face has seriously damaged confidence which plays a big part in the current market. I do believe that the price drops and steadying out in the market will in the long term be a good thing as prices were rising at a ridiculous rate, and as an estate agent i believe that soon the market will be much more open escpecially for first time buyers who finally might be able to buy.
Leave a Comment