Saturday, September 20, 2008

Is Falling House Prices In UK A Blessing?

What are the likely consequences of falling property prices?

(1) Decline in wealth. Traditionally, most average Britons store their wealth in property market. This is a more popular mode of savings rather in banks or stock markets. It could be due to the factor that prices of property are more stable & fast appreciating. But as the bubble burst, significant fall in prices of property leads to dramatic drop in household wealth.

This could result in slowdown of consumer spending which leads to lower economic growth. If consumer confidence remains low, very likely UK economy will run into recession. I personally believe that periods of negative economic growth is imminent, given that house price predictions often becomes the front page news. In fact the 1991-92 recession in UK was largely due to house prices that fell by as much as 15%

(2) Interest rate adjusted downward. The Monetary Policy Committee (MPC) may consider to reduce interest rates if the downward spiral continues. This is done not to prevent prices of house from falling further but rather to meet the inflation target of CPI 2% +/- 1%

(3) Reduce inflationary pressure. As falling property prices translate to slower spending into the economy, we may witness a period of low inflation in UK economy


(1) Benefits the first time buyers. House prices had increased by an average of 165% since 1992. As such many young generations find it hard to get on the property ladder. In some areas, ratio of house prices to average disposable income is 5:1. Therefore the recent UK property market slump is said to best the best entry point for young working people

(2) Relieve the shortage of key public sector workers. There is an acute shortage of key workers like doctors, nurses, teachers & police in areas like London & South East. This is accrued to 2 factors. First, prices of house in relation to their earning power are extremely high. This is worsened by the slow increase in earnings. Hence they prefer to work in the North where housing is more affordable. Some place like Gerrards Cross in Buckinghamshire proved to be the least affordable town in Britain for key workers where the price of a 3 bedroom house is around 26 times the average income of a nurse

(3) How likely will MPC slash interest rates? In the period of housing loom, very often MPC will cut rates to meet the inflation target. But this round is rather interesting as UK’s inflation rate is already standing at all time high of 4.7% (July 2008) & some economists even predict that it will skyrocket to 5% by year end. Therefore reducing interest rates from the current 5%, is likely to aggravate the situation

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