Deflation Could Unravel the Housing Market in The United Kingdom
For the first time in February inflation was about zero and lots of people were concerned that if deflation was to continue on the long-term it might end up wreacking havoc, at a time when the housing market in the UK seems to be in a crisis, compounded by the uncertainties of the general election.
As per the Office of National Statistics data, inflation seems to have dipped 0.3 percent on January as per CPI (Consumer Price Index) even as the cost of books, games, toys and food got cheaper. Over the short term, affordable consumer products become an additional boost to the cost of prices. Dipping of material goods makes the cost to short up. Nonetheless, in case deflation was to be sustained for a longer period the housing market could inadvertently flip.
While there is bad deflation and a good one, in the world of housing market a clean difference between the two does exist. In the case of good deflation, it results after a registered growing and bountiful supply showing that the industries are working well. As the oil supply shot up and pump prices fell, the cost of the product went down even as material goods of production dived bringing about disinflation across the UK. This has also brought a severe competition in supermarkets since food prices have reduced the activity of discount grocers making the shopping basket very cheap.
As the prices for daily products become affordable and the household pockets have more money, it is only fair to expect people will be making moves for more property, such as an additional 100 square feet of space or extra bedroom. Interest rates are low and credit will eventually be cheaper and the mortgage market will definitely see a lot of activity. With lots of pounds in people’s pockets, withstanding mortgage payments will be natural. As a result, transactions will be confidently driven and house prices given a boost.
Good deflation is almost another way of saying that no one should expect things to improve or get cheaper. Spending is expected to take place as money moves about and affects the housing market positively. Nonetheless, if deflation sticks around longer and people get used to it, chances are it might turn sour.
In Japan, bad deflation has already been seen in the last twenty years and already threatening the eurozone as much as it has been restrained into inflationary pressures. As people predict prices of goods will be affordable in a couple of months, buying of goods will stop and the value of goods affected as business turnover is thumped and ultimately jobs.
As such, existing homeowners will not like the news. New data has shown that prices of houses dipped by 0.2 percent between December 2014 and January. In fact, the growth rate of house prices went down from 9.8 percent by December 2014 and dived to 8.4 percent for the entire year up to January 2015. Any other drop in house prices will in turn give people no reason to move.
Bad deflation indicates the economy is weakening and will spook the housing market already sensitive to political events and interest rates.
First time house buyers might benefit from dipping house prices to buy expensive property in South East and London but deflation on the longer term will threaten the income of those seeking employment for the first time or those seeking another job, meaning that families, couples and young workers will be unable to buy new property.
However, the buy-to-let investors in the longer term will have a field day as they are able to buy cheap property. Financial analysts believe deflation is not a permanent economic story in the UK as more focus turns to pre-election and politics.