The Latest Report Brings Good & Bad News About House Prices

Why is the housing market important to the economy?

The housing market is closely linked to consumer spending. When house
prices go up, homeowners become better off and feel more confident.
Some people will borrow more against the value of their home, either to
spend on goods and services, renovate their house, supplement their
pension, or pay off other debt.

When house prices go down, homeowners risk that their house will be
worth less than their outstanding mortgage.  People are therefore more
likely to cut down on spending and hold off from making personal

Mortgages are the greatest source of debt for households in the UK.
If many people take out large loans compared to their income or the
value of their house, this can put the banking system at risk in an
economic downturn.

Housing investment is a small but unpredictable part of how we
measure the total output of the economy. If you buy a newly built home,
it directly contributes to total output (GDP),
for example through investment in land and building materials as well
as creating jobs. The local area also profits when new houses are built
as newcomers will start using local shops and services.

Buying and selling existing homes does not affect GDP in the same
way. The accompanying costs of a house transaction still benefit the
economy, however. These can include anything from estate agent, legal or
surveyor fees to buying a new sofa or paint.

Why do house prices change?

House prices have changed a lot over time.

The average house price was a little over £10,000 back in 1977. Roll
forward 40 years and the average price has risen to £200,000. Even with
the general increase in the prices of goods and services, house prices
are now around three times as expensive as they were in the late 1970s.

For one thing, house prices tend to rise if people expect to be
richer in the future. Normally that happens when the economy is doing
well as more people are in work and wages are higher.

House prices also tend to rise if more people are able to borrow
money to buy houses. The more lending banks and building societies are
willing to provide, the more people can buy a house and prices will

The Bank of England also affects house prices through setting the key
interest rate in the economy. The lower interest rates are, the lower
the cost of borrowing to pay for a house is, and the more people are
able to afford to borrow to buy a house. That will also mean prices will
tend to be higher.

There are also more fundamental reasons why house prices may change.

For instance, demand for housing may rise if the population is
increasing or there are more single-person households. Growing demand
usually means higher house prices.

Prices will also tend to be higher if fewer houses are built,
reducing the supply of housing. The fewer houses that are built, the
more people will need to compete by increasing the amount of money they
are willing to spend to buy a house

There have also been times when house prices have increased a lot
just because people think prices will continue to rise. This is called a
housing market bubble. Bubbles are always followed by housing market
crashes when house prices fall sharply.

This happened in the 1980s. Between 1984 and 1989 house prices doubled, which was much higher than the growth in people’s earnings. The unsustainable rise was followed by over five years of falling house prices. It then took until 1999 before house prices had recovered to the level they were in 1989.

© Bank of England