Do Falling House Prices Really Matter?

Unless a house is sold, any increase or decrease in its value is purely an ‘on paper profit or loss’. You could borrow against the value of your house, you could be taxed on it (if you were to die and pass it on to next of kin), but unless you actually sell it, the change in value is of no major relevance to household finances.

Changes in house prices are not taken into account in calculating the rate of inflation. Neither do mortgage repayments figure in that calculation – surprising considering that they form a significant proportion of the monthly outgoings of the average family.

For most people, the prices of buying and selling in the housing market are relative. If your house drops in value, it is likely that the new house that you are purchasing will have dropped in value too. The key factor is the difference between the two - the amount you have to borrow in order to make the move.

The ups and downs of the housing market

There have been 11 years of increasing house prices. Properties in the UK have nearly tripled in value over that period. We have now entered a period of rapid downturn where property values could fall by up to 50% from their peak last year. The people likely to suffer the most are those who purchased houses in the last three years and are now experiencing negative equity, those who borrowed against the value of their home to finance their business, to buy a second home or to pay off debts. Many will find that they paid more (and in many cases borrowed more) than their homes are now worth.

Again, for the majority whilst their houses are now worth less, when the time comes to move, the house they want to buy will also cost less. As a consequence, they are unlikely lose out overall. The upside of the drop in house values is that it will make things easier for the first time buyer, the lifeblood of the housing market.