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The UK’s Property Fuelled Economic Growth Could All Go Wrong

The housing market in the UK, and the south east of the country in particular, is seeing its best period of growth in a long while and although this is a positive, it has left many dreading what will happen if a crash happens.

Only a few short years ago, during the worst of the recession, building sites across the UK were boarded up and staff laid off. Why? Nothing was selling. Banks weren’t lending and the whole market went into what looked like a fatal spiral.

George Osbourne intervened in a monumental way with the introduction of the Help to Buy scheme, what was effectively the government giving financial assistance to homebuyers. The effect of this has been significant. In fact, it has led economists in some quarters to fear the worst: that we are once again in another property bubble destined to burst. And burst badly.

So, how what could go wrong? How will the UK economy be affected by declining prices?

There will be a fall in consumer wealth

If house prices fall, negative equity will set in and this will mean that the prices of the houses will be less than what people bought them for. When this happens, these homes will be repossessed and the owners will continue to owe money on old mortgages.

Reduced consumer spending

When there is a fall in consumer wealth, confidence and spending will be affected leading to a sharp slowing down of equity withdrawal. This has been the major cause of aggregate demand in the UK.

Recession may kick in, again

Since falling house prices will cause a fall in AD, recession is likely to kick in. This is what played out in the early 90s when falling house prices caused recession.

Therefore as the housing market continues to soar the government is taking measures to prevent any bubble bursts. Some of the measures it has taken include:

Stricter borrowing rules

These rules came in this April meaning that lenders now have to subject borrowers to stricter checks confirming their ability to repay loans taken out. According to the mortgage brokers at FirstMortgage.co.uk, there was a general decline in mortgage approvals between February and March showing that banks are already taking a conservative approach.

Stopping of the FLS plan

In January, the BOE stopped giving incentives to banks for them to give out mortgages. This FLS plan came into force in 2012 when the housing market was struggling.

Experts are however still expecting the government to do more so as to avoid a housing market collapse. New measures expected include:

  • Forcing banks to hold more money to cover riskier home loans
  • Asking borrowers to show evidence of being able to repay loans even with   a 3.5% rise in interest rates
  • Restructuring of the Help To Buy plan
  • Introduction of Mortgage caps
  • Introduction of stamp duty
  • Raising of interest rates

It remains to be seen what actions will be taken but the property market is sitting on the knife edge and it could kick off domino effect in the property market when it falls over that edge.

 

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