Banking firm Halifax, a trading division part of the Bank of Scotland which is owned by Lloyds Banking Group has recently announced that there has been increased activity in the housing market in March.
The Bank reports that house prices are now 6.5% higher than last years average, placing the average value of homes at £254,606 in March.
Strangely, this increase in house prices has been a direct result of the extension in Stamp Duty Holiday, a decision which at face value is supposed to decrease house prices.
But in reality, an extension in Stamp Duty Holiday means the demand for housing will increase as opportunistic homeowners and landlords will wish to cash in on the financial discount.
Consequently, due supply of houses being inelastic as it takes time to construct them, an increase in demand will yield a sizable price increase, thus illustrating why house prices have risen to 6.5%.
This price rise is particularly good for current homeowners as they will greatly benefit from an increased wealth effect as the value of their assets is appreciating.
Landlords will also benefit from this as they make a larger return on their investment due to the house price rising.
However, individuals who do not own a home will be frustrated with this price rise as they now may be unable to afford a mortgage for a home that they have been observing to buy.
The government has attempted to ease this issue by decreasing the mortgage to deposit to 5% for first-time buyers, but, some argue that if you cannot afford the 10% deposit, you shouldn’t be buying a house in the first place.
So, the increasing house price does ration the market, resulting in more consumers being unable to afford a mortgage, consequently, consumers will be forced to save more to afford homes.
An increase in consumers propensity to save results in a decrease in consumer spending, which accounts for 66% of aggregate demand, therefore, this decrease in spending may lead to a large contraction in aggregate demand.
A reduction in aggregate demand leads to negative economic growth which has negative effects on the UK economy as the output gap has worsened, meaning more resources are being wasted.
Because of this reason, the number of individuals unemployed may increase, placing more pressure on government welfare schemes such as Job Seekers Allowance.
However, a contraction in aggregate demand does mean fewer goods and services are being produced, meaning that there will be fewer carbon dioxide emissions in the UK, improving air quality.
But will a 6.5% increase in house prices lead to negative economic growth? Probably not.
Consumers have already saved during the pandemic and those who want to buy a mortgage probably have, and, consumers who have not used their savings on a home are most likely eager to go out and spend when the lockdown restrictions are lifted.
This means that the era of consumer saving which has occurred during the lockdown will likely end very soon once non-essential stores open, hence, instead of an economic contraction we will instead see growth despite the house price increase.
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