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Eager for a House Price Fall? It's Time for a Lesson in Economics

January 15, 2019 in Economics

By Ryan Bourne

Ryan Bourne

The British public, a host of commentators on Twitter, and even
some economists seem to think so.

A recent YouGov poll asked Britons whether a 30 per cent fall in
property values after Brexit would be a “bad thing”.
Just 32 per cent of Leavers and 46 per cent of Remainers agreed
that it would be an economic negative.

The majority view here is embodied by former member of the
Monetary Policy Committee, Andrew Sentance.

When Nationwide’s December house price data signalled that
price growth had been the slowest in six years, he tweeted
“contrary to public perception, this is good news. Slower
house price increases help improve affordability ratios, allowing
more first-time buyers to get on the housing ladder.”

What matters is not
whether prices are rising or falling, but whether the cause of that
change makes us better or worse off.

He is not alone. Referring to the recent YouGov survey, one
Brexit expert agreed that “if one claims to want a better
future for our youngsters, one might actually want prices to
fall”.

This is an increasingly popular sentiment from those worried
about home ownership rates and intergenerational inequity.

And yet, as standalone statements, these views are incredibly
misguided.

That’s not to say that falling prices are necessarily bad
- but nor are they automatically beneficial.

Back in your first economics class, you are taught that prices
are determined by the interaction of supply and demand. So to
understand whether falling house prices are positive or negative,
we need to know the reason for the change.

Given the problem of housing affordability, it would obviously
be great news if building rates had significantly increased owing
to the release of more land for development. This would boost the
supply of new homes, driving down prices. That would improve
affordability, and be highly likely increase home ownership
rates.

But that’s not what the Bank of England had in mind when
modelling what might happen following Brexit. The work about house
prices falling by 35 per cent was not a forecast, but a supposed
“worst-case scenario” if the whole financial system in
the UK gummed up in the event of a no-deal Brexit.

You do not have to believe that such a scenario is likely or
even possible to acknowledge that the hypothetical collapse of
financial confidence is unlikely to have positive results.

In fact, a doomsday financial sector shock would shrink real
incomes. Far from being more accessible, house prices would be
falling precisely because large numbers of people found them even
less affordable than before, leading to a drop in demand.

Worse, the low prices caused by restricted demand would provide
little …read more

Source: OP-EDS

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