For the past seven years housing market was growing very rapidly. This increase caused the rise of rent equilibrium, and a price increase. Thus over the past 12 months, house prices in Britain have increased by about 30 percent. London market is certainly over-valued. This also could be a result of rising building and land costs. Therefore demand for property became lower, and banks were trying to maintain the housing market stability by offering low interest rates on borrowing partly driven by competition. The almost stable low inflation rate allowed them to do so. Consequently, a lot of homeowners were willing to sell property at higher price, thus the supply has gone up but less people could afford to buy. So increase in house prices draw the buyers in and encouraged owners to increase debts.
Nowadays, the inflation rate is growing, which leads to the increase of interest rates. This is a big problem for borrowers, because the repayments scheme will change and people will have higher debts. Also because of inflation the people’s income is falling as well. The plight of low-income homeowners is only now receiving needed attention.
One of the five families, says “Economist’s” research, is facing a problem with debts repayments today because of rising inflation. Thus, debt for property as a whole is rising and there is a possibility of housing market going into recession. Yes, those borrowers who recently have taken loans according to affordability instead of traditional income multiples, and by doing so ignored the uncertainty, are hugely vulnerable in price collapse.
Sir Edward George, governor of the Bank of England, said that the unemployment level is remaining low, which is a good sign, and this is limiting the likelihood of a substantial rise in interest rates while inflation.
Moreover, Sir Brian Pitman, the Master of the Guild of International Bankers, suggested that inflation rate is not going to rise dramatically, and with high employment level and quite stable interest rates house prices will remain unchanged. Thus, the consumer property debt should be covered soon.
My personal point of view is that there would be a further downturn in housing market, but very slow. According to the Labour Force Survey( 2002) unemployment is rising, government financing are rapidly deteriorating, inflation is going up, as a result interest rates might increase, consumer property debt has reached the highest levels, which has influence on consumer spending and government depends on it very much. Inflation disrupts investment in housing market in particular and therefore affects the overall performance of the economy. Also this can lead to a further rise in unemployment as demand for houses will fall; less estate agents, builders etc. are needed. Moreover there is always a trend after boom recession takes place that is only a matter of time.
What can be the consequences of housing market collapse? First of all banks would be less willing to invest in falling markets, borrowers less willing to borrow to buy unprofitable assets, prices would decrease further. Consumer would try to replenish their savings, therefore consumption will fall, investments will decline, stock market would fall, unemployment would rise further, and if pound fell, there would be even stronger inflationary pressure. As a result interest rates would go up, increasing the burden of debts, putting further downward pressure on house prices. Thus the system would find itself in a vicious cycle and the control house prices would go out of hands.
Moreover, today the world situation is unstable; the possibility of war is very high. And if the war takes place, it will be very difficult for housing market to survive. The whole economy will suffer; there would be much less investments and therefore spending.
This should not be allowed. And as housing market is the Achilles hell of the UK economy, government should control the inflation rate and try to keep it down by managing aggregate demand for property. Thus they can control investments. And as debt ratio is strongly dependent on income, while income is not normally distributed nowadays, then the UK governments might consider redistributing of income in order to control inflation and decrease borrowing. Also it is suggested that there should be more affordable property and if not than government should invest more in housing market. Some economists and financial advisors predict the growth of the market by 3 percent at the end of 2003, but others say that it can not be possible without firstly income redistributing and secondly, without rising the level of economic activity, which is not that easy.
To conclude, almost all homeowners think in short terms, however, government should be concerned with long term perspectives and try to maintain the long term position of the market.