House Prices and the Economy

11 Apr
House Prices and the Economy

House Prices and the Economy

The housing market is the name given to buying a house to live in or as an investment.

House prices are linked to consumer spending. When homeowners are better off and more confident, they borrow more against the value of their home to supplement a pension or pay off other debt. This means that property prices rise.

However, house prices go down when people cut down on spending and personal investments. At these times homeowners are at risk of their property being worth less than the outstanding mortgage value.

Mortgages are the greatest source of household debt. If too many take out large loans compared to their income and or value of their property, puts the banking system at risk of an economic downturn.

Housing investment is a small part of measuring the economy’s output. Buying a new build property directly contributes to total output via investment in land, building materials, and job creation. Local communities also benefit, as new housing brings more people to the area to use the services available.

Buying and selling existing property doesn’t affect GDP in the same way. The costs from the transaction still benefit the economy, but through different means, such as estate agents’ fees, surveyor fees, and furniture costs.

There are several reasons why house values may go up:

  • When the economy’s doing well, and there are rises in employment and wage growth, people expect to be richer in the future.
  • More people can borrow to buy. If more banks and building societies are willing to lend, more people can purchase.
  • Interest rates. The lower the cost of borrowing to buy a house is, more people can afford to borrow and buy property.
  • There’s a rise in demand due to population growth.
  • A reduction in supply, fewer houses being built means that more people must compete for what’s available.

Reversing a decades old trend, over the next five years growth in regional cities is forecast to outpace London and the South East. The North West is the fastest growing region with prices rising by 21.6%, followed by 20.5% across Yorkshire, and 17.6% in the North East. In comparison, London and the South East are only expected to see single figure growth of 4% and 9% respectively.

Generally, rising house prices encourage consumer spending, lead to higher economic growth, and are a good indicator of what the future holds for certain areas. By locating assets in cities with strong growth prospects, investors place themselves in a strong to position to enjoy high medium to long-term returns, and beat any short-term downturns.

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