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With House prices falling, to what extent should the government intervene?

Benefits of Falling House prices

1. Increase the affordability of housing. Currently many first time buyers are unable to buy houses because house price to income ratios are very high. As house prices fall, people will be able to live cheaper; this increases living standards, especially for young people.

2. Reduced Inequality. There is wealth inequality between those who bought a house and those who are trying to get on

3. Increased geographical mobility. Lower house prices make it easier to move, especially areas like London where it is very expensive. Low high prices will make it easier for expensive areas to attract key public sector workers such as teachers, nurses and doctors. This improves flexibility

4. Discourages speculation in the housing market. Rising prices encouraged buy to let investors and people buying second homes; this added to the ‘froth’ of the housing market, and will fall now.

5. A long term correction is needed.

Reasons to Intervene in the Housing Market.

1. Falling House prices could tip the economy into recession. Lower prices reduces consumer wealth and creates negative equity. This means that consumer spending will fall. It could be a trigger to a general slowdown.

2. It is better to reduce house price volatility. It is better to keep house prices stable; if they need to readjust it is better that it is gradual rather than dramatic.

3. Difficulties of Intervening.

It is difficult for government to influence house prices. The mpc could cut interest rates, but, this may cause inflation to increase above their target. House prices is not a target for the MPC

The government cannot influence house prices very much.

How Should the Government intervene?

1. Dealing with long term shortages of the housing stock.
2. Encouraging fixed rate mortgages to reduce volatility
3. Ensuring minimum standards of housing in the private sector.
4. Provision of affordable housing for key public sector workers.
5. In short term, try to rebuild confidence in mortgage sector.
6. Regulation of mortgage industry to avoid excesses seen in US sub prime sector.