What Happens When House Prices Fall?
February 12th, 2008 | by admin |Many people have been predicting falls in UK house prices. These are some of the economic effects of house price falls.
Negative Wealth Effect
If house prices fall, then people will see a decrease in the value of assets; this causes lower consumer confidence. There is also less scope for equity withdrawal. When house prices fall people cannot remortgage to get a bigger loan. This reduces consumer spending further. Equity withdrawal has been a big facto in increasing UK consumer spending.
- 75% of households are homeowners. Housing is by the biggest form of wealth. Therefore, when house prices fall, it is has a very significant impact on consumer spending.
Do House Price falls cause a Recession?
Lower consumer spending may cause a fall in economic growth and this could push the economy into recession.
However, it depends upon
Other components of AD. e.g. If government spending increases then AD may not fall.
Situation of Economy. If the economy is close to full capacity, then a fall in AD will cause lower inflation but not a recession.
Negative Multiplier effect.
The initial fall in consumer spending may cause a bigger final fall in GDP.
Interest Rates
With lower inflation, the MPC will be able to cut interest rates, providing relief for homeowners