Difficulties in Preventing Housing Slump

Two readers asked a question about Why can’t the government can’t prevent house prices falling?

Firstly, it is debatable whether it is even desirable to try and prevent falling house prices. The housing market has a strong downward momentum and it would be very difficult for government to prevent this. The government will be more concerned about trying to deal with related issues.

• Preventing a freezing of bank lending (this is crucial to strength of Housing Market)
• Dealing with recession / negative economic growth

The best hopes for a recovery in the housing market come from the prospect of much lower interest rates. By the end of 2009, interest rates could fall to 2% making buying a house relatively more attractive. However, the MPC will be cut because the MPC fear for prospects of economy rather than because they are targeting house prices.

However even with lower rates, because people expect significant house price falls, it is going to be hard to encourage much market activity until there is a consensus house price falls have bottomed out.