Thursday, 28 October 2010
Falling UK houseprices are essential for the economy
However, for the last 2.5 years the story has changed. No one is now treating their house like a cash machine and Phil Spencer and his crew no longer sully the airwaves (his firm appropriately went bust last year).
People not using their houses like cash machines means there is less consumer spending in the economy. Also less activity in the market means the housebuilders are not doing so much construction, sparing up capacity in that sector. Then of course there are the poor volumes for those highly cherished estate agents.
Furthermore people are paying back their mortgages, this is profitable for the banks, but leads to an contraction of money supply, as money paid back is not replaced; the banks are using this money to offset losses, not to re-lend on property where they are massively over-exposed.
So it would seem falling prices are not a good thing. This is what you can read across a range of economic commentators.
However, all of the above should be the normal state of affairs. Trying to have policies which move us back to igniting a property bubble would be insane as there was huge waste of valuable capital and easy profits for people do nothing; non productive speculation is not a long-term basis for a large economy like the UK. At least the City Speculation skims the world markets and not other UK citizens (they register as collateral damage only).
Already we have negative real interest rates, if we have these and still house prices fall it suggests they have a lot further to go. Managing this decline so that it does not distort the economy too much is crucial but falling prices are in many ways essential to a healthy economic recovery - it will show the economy re-balancing to a more stable state.
The takeaway here for me is that it means interest rates are going to stay low for a long time; if only to preent a housing crash that will occur if they are moved up swiftly. There will be a strong correlation with falling house prices and low interest rates (until rampant inflation gets our of control, but that is a story for another post).