Benefits and Drawbacks of Rising House Prices

In this revision video we will be exploring some of the arguments about whether rising property prices are (on balance) positive or negative for the health of the UK economy. The housing sector bridges both micro and macroeconomic issues and addressing housing issues is something that has become a major challenge for governments of all political persuasions. One of the big uncertainties at the moment focuses on how will Brexit affect UK house prices and mortgages.

Home-ownership in the UK

In Britain, just under two thirds of households own the house they live in and half of these are still paying off their mortgage. The remaining third of households are renters, split fairly equally between private and social renting.

Average house prices

House prices in England and Wales are now more than £230,000 - with significant regional variations.

One reason for the strong rise in house prices in recent years have been cheap money – lower mortgage interest rates has made it easier to buy homes and has pushed up prices all around the country. A recent article from Sky’s Ed Conway made the point that for some parts of the country, the problem isn't the number of homes out there but their quality with a decaying quality of housing making them less attractive.

Regional house price differentials

On a regional basis, London continued to be the region with the highest average house price at £485,000, followed by the South East and the East of England, which stood at £327,000 and £295,000 respectively. The lowest average price continued to be in the North East at £132,000. But prices in London now seem to have almost stopped rising. At the time of the Brexit vote in June 2016, London house prices were growing at an annual rate of 12 per cent. But recent statistics show that they fell by 0.4 per cent in the year to May 2018.

Benefits from rising house prices

1. Increased prices and housing transactions generates tax revenues e.g. from Stamp Duty. This helps to reduce the size of the government’s budget deficit. Stamp Duty revenue was almost £13 billion in 2017-18.
2. Higher prices may lead to an expansion of new house-building as construction companies have the incentive of making more profit. This adds directly to GDP and may stimulate a multiplier effect in local areas / regions.
3. An increase in prices may lead to an improvement in the consumer confidence of home-owners which might then cause a rise in consumer spending
4. Householders can take equity withdrawal from the increased value of their house e.g. by re-mortgaging their property and releasing some of the housing equity

Drawbacks from rising house prices

1. Housing is becoming increasingly unaffordable especially for first-time buyers and families on median incomes. This leads to rising wealth inequality. Chances of owning home in UK have more than halved in 20 years according to the Institute for Fiscal Studies - or 25- to 34-year-olds earning between £22,200 and £30,600 per year, home ownership fell to just 27% in 2016 from 65% two decades ago.
2. Expensive property leads to an increase in rents – because rented housing is a substitute for owner-occupation. This reduces geographical mobility.
3. Mortgages become harder to get and this encourages people to get into more debt – which has big risks if the economy suffers another recession. According to research from Halifax, the average deposit put down by those buying their first home in the first half of 2018 was 16% of an average price of £210 – i.e. over £30,000 deposit is needed, well out of the reach of many people in full-time jobs
4. Rapid house price inflation lead to unsustainable asset boom and busts which ultimately leads to macroeconomic instability