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.
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