Friday, December 26, 2008

Media & Its 'Contribution' To The Paradox of Thrift

Fall in house prices ‘welcomed’ –11th May 2008
House prices dropped 1% in June –28th July 2008
House prices double digit fall –4th September 2008
UK house prices continue fall –2nd October 2008
UK house prices to fall by 30% --15th December 2008
Mortgage arrears to hit 500, 000 –18th December 2008
Lender axe house price forecast –19th December 2008
Mortgage lending shrinks again – 23rd December 2008
House prices will fall further –24th December 2008

I guess I don’t have to do much explanation here. All those news were taken from BBC & in fact these are just an insignificant portion of the broader coverage on how the UK housing market performs. We still have Telegraph, Financial Times, Guardian etc

Source of diagram: BBC

If you observed both from the news & the graph, price of houses in UK is continuously nose-diving. There are many factors contributing to these particularly on the demand side. The fact is that increasing number of people have chosen to shun away from the property market. Why? Because they are waiting for a period ‘comfortable’ or low enough as an entry point. In other word, people are deferring spending onto big items.

Here comes the relevant concept-paradox of thrift, propounded by the great British economist, John Maynard Keynes in the early 1930s during the period of Great Depression

According to him, recession or even depression can be self-reinforcing. If individuals think that in the current period of recession, increasing personal saving is the best thing one can do, then ultimately this will do more damage to the whole economy & to that individual itself. To further support, it makes huge economic sense to save & defer current spending since there is much space for house prices to fall. Why buy now when one can buy at a cheaper price later?

But if everyone thinks the same, demand for houses will fall. Dipping house prices will hit nation’s newspaper headline & people will continuously think that house prices are yet to rock bottom. As such spending is further postponed. This brings substantial damage to homeowners’ wealth since UK has large proportion of people storing their wealth in property market. Many have went into negative equity & that is amount of loan greater than value of house

This will further reduce economic confidence & aggravate contraction in economic activity. Therefore DEPRESSION is the word! UK economy is one the worst hit in Eurozone given huge contraction in economy is heavily owed to falling property prices.

Perhaps, the Britons may need to learn from the Great Depression in Japan & avoid the same thing happens again

Well, we can’t blame the media for ‘indirectly causing’ the recession. They are just doing their job anyway

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