UK Housing Sector

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.

  1. 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
  2. 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)

By on December 30th, 2008

3 thoughts on “UK Housing Sector

  1. Fascinated with your answer – especially as the reader’s question is exactly that set for a Level 1 university economics essay at my home institution. However, the said ‘decline in economic growth’ was intended to apply to a declining rate of growth, rather than a fall in GDP i.e. the possible precursor to a recession, rather than the recession itself. (Positive first derivative and negative second derivative, if we talk differential calculus for a moment)

    It’s a subtle distinction, and one easily missed. The fascination is therefore with issues such as the changing expectations of consumers of property (housing) and with those supplying/constructing property (ditto). On the demand side, this might lead to a shift back in the market demand curve, and all the implications that might entail. These might then be followed through back to the macro level. Or not.

    On the supply side, it allows a student the chance to explore/play with the lags inherent in markets such as those for goods such as housing. The price inelasticity of supply is a clear example of a ‘good’ concept to invoke. Such a lag might lead to the ‘usual’ lagged impact upon employment to be extended yet further. Possibly.

    Enough already.

    Best wishes…and my apologies to you, Tejvan, on behalf of those students who plagiarised your answer.

  2. Yes, good point. At the time (end 2008), economic growth had just become negative so I answered it on assumption they were referring to current situation of negative economic growth.

  3. It seems to me that the housing market is always going from one extreme to another…

    During this time of mortgage and lending constraint 1st time buyers cannot find a way onto the market and so stay at home longer or rent – this bottles up demand for when finance will be available and another property boom will occur.

Comments are closed.