What Happens along the way when prices fall

In the UK the house prices is closely linked to economic performance. Studies (OECD) have shown that between 1971-2002 that a 1% change in values of British house stock led to a 0.7% change in consumer spending.

In other parts of the world a strong economy creates higher house prices via rising and falling unemployment. But in Britain higher house prices themselves make the economy look even stronger.British citizens felt very confident in the housing wealth that they took equity out of their homes and spent it. Mortgage equity withdrawal was a key economic growth during the labour government years.
Rising house prices also fed the wealth effect, people tend to run up more credit card debt for the extra luxuries if the equity of their homes went up even if the debt was more than they could pay on an income alone.
This is why Britain has one of the highest debt level amongst its citizen in the west, many were caught in the housing bubble burst and are now suffering. This in turns reduces the consumer spending drastically as mortgage holders tend to make more payments towards the mortage when they start to fall in negative equity as prices keep crashing. Lesson to learn don’t leverage yourself with equity that you don’t have, otherwise you risk losing more than you put in!

Tags: britain, house prices, Mortgage, uk

Category: Property News