Monday, July 14, 2008

How Bad are Falling House Prices?

With house prices falling in the US and UK (and predicted to fall in other Developed countries) an important question is - Are falling house prices good or bad?

Reasons to Be Worried about Falling House Prices

1) Lower consumer spending

In the past, UK and US consumers have used rising equity values as a way to finance higher consumer spending. Consumers have been able to remortgage their house and spend. As house prices fall it is no longer possible to remortgage and gain equity withdrawal.

2) Lower consumer confidence.

Most consumers in the UK (75%) are homeowners; therefore, the value of houses is an important economic variable. As house prices fall, people lose confidence. Falling house prices are seen as a key barometer of the economy. If the value of their most important asset is falling, people will become more risk averse, saving more and spending less. This will cause lower consumer spending and lower economic growth. This is one of the most important factors pushing the economy into recession.

3) Construction sector

Falling house prices have led to the cancellation of many new housing projects. House building firms have seen a slump in demand and therefore, have laid off many staff. This rise in unemployment is causing further economic problems.

4) Negative Equity

Falling house prices increase the number of homeowners facing negative equity (home worth less than mortgage loan). This becomes a real problem for those at risk of defaulting. If people default they still owe money to the bank. This is bad for the homeowner and problematic for the banking sector. Negative equity will further harm the depressed balance sheets of banks. It makes banks more reluctant to lend money and may require more government backed bailouts. The more house prices fall, the greater the levels of negative equity will be. The problem is most acute in the US, where many took out 100% mortgages in the hope of rising house prices; yet, many of these new 'subprime' homeowners now face losing their home and being left with outstanding debts.

Benefits of Falling House prices

1) Correct market imbalance.

Arguably house prices became divorced from price to earnings ratios meaning that they were overvalued. Falling house prices is helping to correct this market imbalance, which had to come at some time.

2) House prices more affordable. Rising house prices led to intergenerational inequality. Many first time buyers could no longer afford to buy new homes and therefore were kept out of the property ladder. Now that prices are falling more first time buyers are able to afford a house (not withstanding the problems in getting mortgage loans)

more on falling house prices


Real Estate Omaha said...

Well that not bad for the investors might be bad for the sellers.Well if you are going to get the estate at down prices then u can wait for a period when it goes high and then you can earn profit from it.

Jina Douran said...

There are a lot of homeowners in the UK really. There seems to be a rise in demand for bespoke conservatories as well.