The economic impact of rising and falling House Prices

Rising house prices and consumer welfare are likely to increase with an increase in mortgage equity withdrawal is associated with. Mortgage equity withdrawal means that people remortgage and take a bigger loan against the value of their house. It means they have more money they can spend and this leads to an increase in private consumption and hence aggregate demand.

Rising house prices can also consumer confidence. It encourages people to mindother loans because they know that they always "Equity release can 'from the value of their house if necessary.

Therefore, the rise in house prices can raise consumer spending and economic growth involved. Rising house prices can also be inflationary. This occurs when rising house prices cause economic growth to that is no longer viable. For example, in the late 1980s, rising real estate prices is a crucial factor in the emergence of the inflationary boom of Lawson had 1989th However, the rising real estate prices do not always cause inflation. If other components of economic growth to rise at a slow pace, can not result in house prices inflation. For example, between 2001-2007 were in UK house prices rising much faster than inflation (which has remained in the governments target of 1-3%)

Affect of falling house prices

Falling house prices tend to have a greater impact than rising > Property prices.

People are on the rise in property prices and the majority of homeowners are not really share the increased equity by remortgaging. Cause However, if house prices fall, they can, the sharp drop in consumer confidence. People in terms of falling house prices as a serious problem and in the past was associated with a decline in consumer spending as people become more risk averse.

For those who have recently acquired or remortgaged> House of falling house prices can lead to negative equity. Negative equity is the value of the house is less than the total amount of the loans. This is a real problem for those who are struggling to meet mortgage repayments will be, there is no way to change the listing, the mortgage and reduce the monthly payments.

Also the impact of falling house prices depend on other variables in the economy.

For example, has been falling house prices in 1991, with an associatedPeriod of very high interest rates. Therefore, homeowners were faced with a twin problem of high mortgage costs and falling property prices. If real estate prices fell in the United Kingdom in 2007 or 2008, real interest rates would probably be much lower. In addition, the MPC would be likely to cut interest rates and reduced the falling house prices inflation pressures.

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