Explain why higher mortgage costs may lead to falls in house prices (4)

“The Bank of England has lifted interest rates 14 times in row in a bid to clamp down on rising
consumer prices in the UK.” The government has been using monetary policy which is to rise
base rate to tackle the high in ation. When base rate increases, mortgage rate also edge
upwards. This means that if people choose to take a mortgage now, a larger proportion of their
monthly payment will go towards servicing mortgage interest. Mortgage holders and buyers will
continue to face higher costs of borrowing. Consumers will avoid borrowing large sums of money.
Therefore, buyers are less likely to buy big mortgages with high risks. Additionally, banks are often
less willing to lend to those with low deposits in a high interest environment, especially rst-time
buyers. As a result, the demand for houses drops while the supply of housing remains the same.
This leads to falls in house prices.

Analyse the possible consequences of falling house prices for the UK's
macroeconomic performance (6)

Falling house prices can trigger a negative wealth e ect, which has a multifaceted impact on the
economy. As consumers see a decline in the value of their homes, they have less con dence to
spend which causes lower spending and higher saving ratios. Since consumption is a vital
component of aggregate demand, a drop in consumer spending can have adverse e ects on
economic growth. Furthermore, falling property values can signal a weakening housing market.
This can discourage the construction sector to invest and build new homes, also leading to a
slowdown in economic growth.

However, while there may be short-term adverse e ects on growth, falling house prices can have
positive long-term consequences too. It has the potential to address issues such as inequality
and geographical immobility. This is because it helps to make buying a house more realistic for
rst-time buyers particularly in high-priced areas like London. Notably, “The lender said prices
had fallen in every part of the UK, with the biggest drop in London”. Additionally, the una ordable
housing price may has caused a shortage of skilled workers. Therefore, it would also improve
labour mobility.

The UK economy has many long-term problems, such as slow productivity growth, Brexit and
falling investment. The persistent in ation and cost of living crisis means the UK economy is on
the brink of recession even before the e ects of rising interest rates and falling house prices start
to be felt. A decrease in the price of houses can potentially lead the economy to experience a
recession. For instance, in the UK, there was a sharp fall in house prices from the end of 2007
which was an important contributing factor of the recession in 2008. The economic activity in the
UK is contracting corresponded with rising interest rate, weaker household spending, high
in ation and falling house prices. Therefore, the UK may also faces “heightened recession risks”.
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 Using the evidence in the articles and your own knowledge, evaluate whether UK
house prices will continue to fall in 2024 (15).

“UK’s in ation rate is three times higher than the bank of England’s 2% target.” The bank’s MPC
repeated rising interest rate to tackle in ation. By making borrowing money more expensive for
consumers and business, consumption and investments will decrease which then slow the rise of
price. As the monetary policy is working, the MPC is likely to adjust the higher interest rate further.
A rise in interest rate means a soaring mortgage rate which squeeze housing a ordability.
Mortgage holders and buyers will continue to face higher costs of borrowing. Consumers will
avoid borrowing large sums of money. The high repayments can cause lower demand for house.
This can be illustrated by using the supply demand diagrams. As the demand shifts from Q1 to
Q2, the price drops from P1 to P2. As a result, the trend of economic activity shows that house
prices will continue to plummet.

On the other hand, the house price may not continue to fall in 2024. “The Halifax is predicting
further falls through the rest of the year.” However, “wage growth has helped a ordability”. As
wages are growing faster than the interest rate, house price can be fairly at in the next year
(2024). This means that people have more purchasing power and borrowers may be able to pay
down their debt more quickly. Therefore, demand for house may improve and the price of houses
may stop to drop. But there is a time lag for wage growth to impact property prices. There is also
some uncertainties about how much the wage will grow and how con dence are the consumers.

Furthermore, the supply of houses is relatively inelastic in the UK. This is mainly due to the fact
that the construction sector is reluctant to build new houses. The shortage housing supply is the
result of economic downturns, high cost of construction materials and labour and government
regulations aiming to protect environment. At the same time, the UK has experienced signi cant
population growth over the years, driven by factors like immigration and population growth. This
has increased the demand for housing. Thus, shortage of new homes will ultimately lead to house
prices rising or being stable.

Overall, the UK’s house prices is very likely to fall in 2024. “The Bank of England has warned that
wage increases will make it harder to get in ation down”, but the UK is expected to avoid a
recession this year. If the main objective is to tackle in ation and avoid falling into recession in
2024, then falling house prices is inevitable.
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