Why are falling house prices bad for the UK economy?

I am a bit confused you hear on the news about the gloomy economy and huge debts etc. But then you hear about how the housing market will hopfully pick up soon and house prices will begin to go up ,but how can inflated house prices be good for the economy. I know they have dropped a bit, but lets face it they are still too high . If house prices are high, people have to take out huge mortgages(bigger debts )and therefore will have less money to spend on the high street on a saturday afternoon, if they were more of a sensible price like 3.5x earnings like they used to be people would have smaller mortgages(less debt) and consumer spending would be higher as we would all have extra money in our wallets when we make that trip to the high street on a saturday,which surley is what is good for the economy

Because if you buy a house for say £150,000 then a few years later it is worth £120,000. You have made a loss on your investment, but if the price goes up you have made a gain.

Generally speaking, it is not bad. Housing prices are returning to a more sustainable relation to income and the value of other real assets. It's only "bad" for those who borrowed a lot of money on those assets with he assumption that they would increase in value. Essentially those people want to be bailed out of a bad bet. Now, of course, if enough people become insolvent because of those bad bets, that presents a liquidity problem for the entire economy, not just those who borrowed.

Extremely bad for the construction industry which employs huge numbers of people. The more people who are kept in work, and paying tax, rather than drawing benefit, the better. Bad news also for investors who finance housing projects (especially pension funds) who will not be able to pay out their members. You are right - the irresponsible lending to people who could not demonstrate capacity to save even a small deposit for a property falls squarely on the banks who have messed up. In my view it's high time the ailing banks were fully nationalised and run for the benefit of the taxpayer.

It's not really true that low house prices are bad for the economy, except for the fact that real estate investments fall and therefore we all suffer even if it is only indirectly. There is a shortage of housing in the UK and so any fall in house prices means that the economy is in trouble.

You are perfectly correct.The so called "Good Years" recently, were founded on consumer credit obtained by people extending mortgages on their homes to fund other personal expenditure knowing or thinking that the value of their home was going to increase and offset all the charges that they would have to pay.This created work ,jobs and a general feelgood factor but it wasnt founded on any sound economic principles but purely on speculation and when the bubble burst the house of cards came crashing down leaving people with large debts and bankrupt the financial system.It was akin to just printing money and the result is the devaluation of the British pound and the failiure of the British government to control the financial system.Realistic house prices are good for the economy because it diminishes peoples debt and debt is bad because your debt if unpaid is akin to stealing somebody elses money and allows youngsters who are the countries future to get a foot on the housing ladder.

You are right in my opinion apparently an economy based on debt is bad but surely if house prices pick up and people start borrowing against the extra equity to buy things is that not boosting the economy with debt. As for the construction industry i thought we have a shortage of houses so is it greed as they cannot get the prices they did before

It's arguable that falling house prices in themselves are not bad for the economy as they are moving back to a more realistic price level, however it's the falling house prices that are damaging the books of the banks due to the fact they are on the books at the higher price in the form of derivatives and loans. This means as house prices fell the loans and derivatives became less valuable and so banks had to restrict lending to keep to the required capital levels they need to survive. This led to some banks that needed to borrow money over a short period not being able to and so collapsing due to lack of short term capital, this then led to banks holding onto there money for fear of this happening to them and hence it was even more difficult to get a loan. To add to this banks all insure each others books using derivatives as insurance systems, so for example natwest might agree to pay out a sum to royal bank of scotland if a certain bond suddenly plummeted in value, in exchange for this natwest would receive a one off payment to make up for taking the risk. This would make the bond safer for royal bank of scotland so they could borrow more money and buy more bonds and still be safe, as the bonds are less risky.... the problem is what if natwest collapses? If natwest were to collapse the bonds are no longer insured and so their risk rises and as the royal bank of scotland now has more bonds than it can safely hold without some insurance it has no choice but to sell its bonds, this means lots of banks sell the bonds and the price of bonds plummets. Those holding the bonds make a loss, the banks then make large losses which they have no protection for as they are no longer insured. The simple answer is that although house prices falling is not a bad thing in itself, the effect it has on all the assets that are linked to the house prices is. Falling house prices triggered the crisis but they aren't the main problem, its just what triggered it. As for spending more money if mortgages were less, that assumes people would go out and borrow more money to spend in such a manner, people saw houses (wrongly) as a an investment that could only go up and so it wasn't spending it was "investment". The reason that housing prices have collapsed is because the banks were getting so lax with lending standards that some borrowers would never be able to pay it back even if interest rates were to change a tiny bit. This will not happen again for a long time now.

To help revive the economy people,businessmen and companies need capital for their business expenses. They need to borrow from banks.They use their assets like houses as security for their loans or overdrafts to borrow from banks. If their house price falls they will get lesser loans or overdrafts and have to pay higher interest rates to banks.Most may become unprofitable and have to cut costs or close. It is the same for a country. A drop in a country's real estate which is its assets will also lower its Sovereign ratings of AAA. When this happens, the country will find it more expensive to finance its inter national debts and investments.This is bad for the economy.

Related articles

Why should the taxpayers pay to fight Somali pirates?
Honda Prelude Owners: What Do You Think?
Buying NEW 2009 Mazda 6 in 2011. Comments, suggestions?
Are Pharmacy Technicians in high demand with the USA's current economy?
Question about upgrading with frequent flier miles?