Essay on Uk Housing Market

732 Words3 Pages
Should the Government leave house prices to market forces, or actively intervene to prevent a house price crash? Justify your answer. Arguments for intervention 1. Falling House Prices Could cause a recession. If house Prices fall it will cause significant problems for the UK economy. There will be a fall in consumer wealth, and declining house prices can lead to negative equity. (house prices are less than what people bought them for). Therefore, some people will have their home repossessed and will also owe money on their old mortgages. The effects of a fall in consumer wealth will be to reduce confidence and consumer spending; equity withdrawal will slow down sharply – this has been a significant contributor to increasing AD in UK). Therefore, falling house prices will cause a fall in AD and is likely to cause a recession. This occurred in 1991 and 1992 when falling house prices caused a recession 2. Reduce House Price Volatility To prevent a house price crash, in the future, the government needs to reduce house price volatility and speculation. For example, the government could try these policies Encourage Fixed Rate Mortgages – Makes mortgages less sensitive to interest rate changes. However, in practise this is difficult to do. Also, it may take along time to change consumer’s preferences from variable mortgages. Higher Stamp Duty. Increased taxes on buying a house will discourage speculative buying – this is a major cause of house price volatility. However, it increases taxes on all homeowners and not just speculators. Increase Supply in Property Hotspots. Rising house prices have caused by a shortage of supply. Increased supply means that a small rise in demand will have less impact on prices. Therefore, this reduces volatility. However, it is difficult to increase supply due to shortage of land and planning permission. It would take a

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