Falling House Prices: A Blessing Or A Curse?

We have recently seen declining property values in the United States and United Kingdom. Some people think that declining property values represents weakness in the wider economic situation, and although this is often the case, there are also some advantages and explanations for why it is good that property values are declining.

- Advantages of Declining House Prices

There will be more bargains in the market. Recently, a lot of young people buying houses for the firs time have effectively been “priced out of the market”. Thus, if prices do fall then it will allow many more young people to make a purchase. It will also assist in reducing the inequality; people that own homes have an advantage when retiring because their mortgage will be paid off. This can help them avoid unnecessary expenses such as rent.

Interest Rates may go down. Falling property values are correlated with a reduction in the inflationary pressure in the economy. This helps allow the Central Banks to slice interest rates. As a result, mortgage repayment costs go down which is a great help to people that own homes.

Greater Flexibility in the labor markets. Soaring property values make it increasingly difficult to move to some areas. For example, London and the South East have had job shortages in important industries such as health care, education and law enforcement. These labor market shortages are often detrimental to local economies.

Help Prevent Speculation in Property Market. The United Kingdom and United States observed that the number of speculators who purchased homes in an attempt to make capital gains has increased. One side effect of this is that it made the market more volatile. Falling house prices gives speculators a much needed “reality check”, letting them know that house prices cannot continue to rise at a rate that outpaces average incomes.

- Disadvantages of Declining House prices.

Declining property values can slow down economic growth. When house prices are on the decline, consumers are faced with negative equity preventing them from remortgaging. Declining house prices also cause a decline in consumer confidence since the housing market is viewed by many as representative of the overall economy. Furthermore, if housing prices fall too quickly, it could help provoke a recession (unless other parts of the economy are sufficiently strong like rising exports and investments).

Declining property values can create negative equity. This occurs when the value a home falls below the cost of the mortgage.

Discourages construction of additional housing. If house prices decline, then home builders will delay the construction of new houses. This could cause a long-term house shortage problem. In the short-term, it will cause construction industry jobs to be lost.