Fall in house prices, good or bad?

I was intrigued to read that a fall in house prices is welcomed by the majority of people in the UK. Whilst a fall in house prices is not always bad news, as that article points out, there are some important downsides that the report appears to have missed altogether.

There are undoubted benefits to reduced house prices, the main one being that if you are looking to climb up the property ladder, your next house will fall more in monetary value than your current home. Also it makes it easier for first time buyers to make that vital foray into the property market.

Of course, a fall in house prices is bad news for those who are looking to trade down their house to a smaller home. This hits the elderly particularly hard, especially when rises in the cost of living are already reducing their spending power.

Two other important factors seem to have been missed in that survey though.

When the value of our homes rises, we feel more wealthy and are therefore tempted to go on spending sprees, splashing out on more luxury goods and holidays, for example. Consumer confidence soars, boosting high street spending and the economy as a whole.

When house prices sag, though, consumer confidence tends to wither away, depressing economic growth and overall prosperity.

The other point is that as house prices slow, the equity available to owners to use as security for secured loans, is also reduced. Loan amounts available to home owners is reduced and therefore total borrowing across the economy falls, affecting high street spending.

Whilst I think reducing total borrowing is actually beneficial, after all total national borrowing stands at £1.4 trillion, I believe that the benefits of falling house prices should be weighed against the impact on the economy as a whole.

So I hope that those 28% of people in the report who wanted the house prices to fall, don’t suffer the bad effects of a slowing economy in the near future.

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