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Should We Worry Over Falling House Prices


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Recently, we have witnessed falling house prices in the US and UK. Some consider falling house prices to be dangerous for the wider economic situation, and whilst this is true, there are also some benefits and reasons why it is good prices are falling.

Benefits of Falling House Prices

  • House prices will become more affordable. Recently, many young first time buyers have been 'priced out of the market'. If prices drop, it will enable more people to buy. It will help reduce inequality; homeowners have an advantage in retirement because they will have paid off their mortgage and can avoid paying rent.
  • Increased Flexibility of labour markets. High housing prices make it difficult to move to certain areas. E.g. London and South East have seen shortages of important groups of workers such as health care workers, teachers and police. This labour market shortages can damage local economies.
  • Interest Rates are likely to fall. Falling house prices are likely to reduce inflationary pressure in the economy. Therefore, this will enable Central Banks to cut interest rates. This will reduce the cost of mortgage repayments which will help homeowners.
  • Discourage Speculation in Housing Market The UK and US saw an increase in the number of speculators buying houses to make capital gains, this made the market more volatile. Falling house prices is a reality check that house prices can't always keep rising faster than average incomes.

Problems of Falling House prices.

  • Lower Prices can cause lower economic growth. When house prices are falling consumers are left with negative equity and so cannot remortgage. Falling prices also cause a drop in economic confidence because the housing market is held dear to consumer's opinions about the state of the economy / personal finance. If house prices drop rapidly it could, ceteris paribus cause a recession - unless other aspects of the economy are strong such as rising investment and exports.
  • Discourages building of New Houses. If house prices drop, then house builders will pull back on the building of new houses. This could lead to a shortage of houses in the long term. In the short term it will lead to job losses in the construction industry.
  • Negative Equity Falling house prices can cause negative equity. This is is when the value of the house is worth less than the mortgage

About the Author

R.Pettinger is an Economics teacher at Oxford and writes frequently on the UK economy and mortgages. He edits a site about Mortgages including a guide to different types of mortgages.

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Article Published/Sorted/Amended on Scopulus 2008-06-10 11:06:03 in Economic Articles

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