Interesting and accessible information, links, video and more for students, teachers and anyone looking for an understanding of economic issues.

House prices and the economy.

RBS (the large banking group) produce really useful 'economic insights' which you can sign up to for free delivery via email - a great way of staying up-to-date with the major economic events and announcements.

The one dated 5.11.12 mentions a number of things including the following:

"Nationwide's house price index grew 0.6%m/m in October. While growth of any sort is good news, this is only the fourth month this year in which prices have risen. The average house price has remained about the same since January 2010 and is currently 11% below the October 2007 peak. However, accounting for inflation the real average house price is 25% below peak. With September mortgage approvals unchanged, and little growth in mortgage lending, the market is treading water."

As you can see, those with houses who bought at the peak have seen the value of this asset deteriorate.  Some people will have bought many years before the peak and therefore would still have seen an overall increase in the value of their house - however, if they are the kind of people who took out a second mortgage on the house (like many people did in the boom years up to 2007) in order to buy a new kitchen, new car, or fund a holiday, they may be feeling a bit poorer now.

House price rises tend to exaggerate booms as people feel wealthier and take out extra loans and mortgages due to this feeling of wealth that their house price rise has given them.  If house prices then go down it can make the economic downturn even worse.  The effects of this can be seen in the Consumption (C) part of Aggregate Demand (AD) and is one of the things which is prolonging the current economic slump.

On the positive side, at least houses are now more affordable, especially for first-time buyers.  BUT that depends on whether people have a safe job, a deposit for a house and are able to get a mortgage - this is the problem which is keeping the housing market flat.

The knock-on effect of this is that if people aren't moving house and don't feel wealthy in the house they are in, they will tend not to buy furniture, new carpets, new kitchens, etc.  This can affect the wider economy and hence makes an economic downturn worse.

Eventually people will get more confident and the housing market will pick up but it is difficult to know when.  But it's probably a good time to buy if you can afford it!