The increase in housing prices increases the welfare of the consumer and is likely to be associated with an increase in the withdrawal of mortgage capital. The removal of mortgage capital means that people renew and take a more substantial loan compared to the value of their home. This means that they have more money that they can spend, and this leads to an increase in consumer spending and, therefore, to aggregate demand.
The increase in housing prices can also increase consumer confidence. This encourages people to borrow other loans because they know that they can always release capital from the value of their house, if necessary.
Increase in housing prices
Therefore, the increase in housing prices can contribute to the growth of consumer spending and economic growth. The rise in house prices can also be inflationary. This will happen if the increase in housing prices leads to unsustainable economic growth. For example, in the late 1980s, the rise in house prices was the key factor behind the 1989 inflation boom. However, the increase in house prices does not always cause inflation. If other components of economic growth grow slowly, housing prices may not cause an increase. For example, in the period 2001-2007. House prices increased much faster than the inflation rate (which was still at the 1-3% government level)
Impact of falling housing prices.
The fall in house prices generally has a stronger effect than the rise in house prices.
People are used to rising house prices, and most homeowners do not release more participation through resale. However, when housing prices fall, it can cause a significant drop in consumer confidence. People see falling housing prices as a serious problem, and in the past, this has been associated with a reduction in consumer spending, as people have become much more averse to risk.
For those who have recently reoriented or bought a home, a drop in home prices can lead to negative capital. Negative capital means that the value of the house is less than the mortgage loan debt. This is a real problem for those who struggle to pay the mortgage; There is no way to change mortgage offers and reduce monthly payments.
Again, the effect of falling housing prices depends on other variables in the economy.
For example, the fall in house prices in 1991 was due to a period of very high-interest rates. Therefore, homeowners face the double problem of high mortgage prices and falling housing prices. If housing prices fell in the United Kingdom in 2007 or 2008, real interest rates would probably be much lower. Besides, this blog link is likely to reduce interest rates, since falling house prices have reduced inflationary pressure.