Readers Question: how does the decline in economic output in the UK affect the housing sector? (note: question updated)
The sharp fall in economic output and consequent rise in unemployment will have the effect of further depressing house prices and demand for buying houses.
- Negative growth and unemployment will contribute to a rise in repossessions. Therefore, there will be more forced sales onto the market; this increase in supply will mean lower prices
- Also, the fear of being made unemployed will deter people from undertaking a big spending decision like this. People will prefer to wait until economic conditions improve.
Some factors will weigh against this. For example, the lower economic output has led to a big cut in interest rates. This has reduced mortgage interest payments and therefore made buying a house more attractive. Lower interest rates should also prevent more home repossessions.
Another issues is that house prices started to fall even before output started to decrease. In other words there are many microeconomic factors reducing house prices. Therefore, the fall in economic output has exacerbated these other factors that are causing lower house prices.
The key issue is a lack of mortgage credit. Because banks are struggling to raise enough money, they have become very cautious about lending this is causing a shortage of first time buyers.
Falling house prices mean lenders are nervous to lend because of negative equity. It also means consumers are nervous to buy (also because of negative equity)