Readers Question: Is it possible the phenomenon to have a relationship between GDP and house prices where an increase of the mean GDP to lead to decreased house prices?
Yes,
An interesting phenomena is that UK house prices have shown an increase during 2009 – despite a prolonged recession.
Typically, in a recession, you would expect house prices to fall.
In particular a rise in unemployment often means people can’t afford mortgage payments, therefore, more houses are sold and prices fall. Confidence is also low, deterring people from buying
When the economy is growing and unemployment falling, demand for houses usually rises.
However, economic growth, is not the only factor that determines house prices.
House prices are rising in the middle of this recession because
- There is an acute shortage of houses on the market. Meaning that house prices are being pushed higher because of low supply (rather than rising demand)
- Interest rates are nearly 0%, meaning mortgages interest payments are low. Mortgage defaults have been lower than expected in 2009, because banks have tried to avoid repossesssion and very low interest rates have made mortgage payments easier to meet.
- House prices did fall 25% from their 2007 peak.
Could house prices fall when we have an economic recovery?
It is quite possible to envisage falling house prices during an economic recovery.
- Firstly, the rising prices may encourage many to put their house on the market (which they have been avoiding during past two years)
- Economic recovery will lead to inflation and therefore interest rates could rise from 0% to 5%. This means mortgage payments will rise causing many who just survived to struggle to meet mortgage payments.
- A large increase in supply could reduce prices during economic growth. Though, in the UK’s case a large increase in supply is unlikely to occur in the foreseeable future.
Related
It seems to be a situation not unique to UK. The prices are likely to stabilize even when economy picks up.