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Falling house prices depress consumer spending

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Consumer spending has been and will continue to be ‘directly affected’ by falling house prices, according to a leading economist.

November’s update of the Nationwide Monthly House Price Index today reported a 0.3 per cent fall to an average price of £163,398.

Vicky Redwood, Senior UK Economist at Capital Economics, argues that a second downward leg in the housing market will add to pressure on an already fragile level of consumer spending in 2011.

“We think that there is plenty of evidence that the weakness of the housing market had a direct influence on consumer spending”, Redwood explained.

“Household goods sales fell sharply. Housing equity withdrawal plummeted. And while both were no doubt pulled in the same direction by other factors, house prices and consumer confidence moved very closely together.”

Along with house prices falling it seems that the recent mini surge in property sellers will be short lived, according to Martin Gahbauer, Nationwide’s Chief Economist.

“In addition, there are early signs that the flow of new property onto the market may be slowing down again as potential sellers observe the recent weakness in prices and decide against marketing their properties at the current juncture”, Gahbauer explained.

“Similar seller behaviour was observed in late 2008 and early 2009, eventually leading to a decline in the amount of property on the market.”

Consumer spending shares common pressures with house prices, but a depressed housing market may affect retailing in areas other than the obvious effect it has on carpet and furniture sales.

With credit scarce the incentive to rebuild housing equity is likely to increase for homeowners, and the Bank of England says that in September 5 per cent of mortgage-holding households had no housing equity at all, while 15 per cent had between zero and 25 per cent.

Redwood continued: “Even if we are wrong in expecting the renewed housing downturn to have a direct effect on consumer spending, many of the factors that will be pushing down house prices are likely to push down on consumer spending too – with rising unemployment being a prime example.

“We continue to expect consumer spending to start to fall again next year.”

Published on Wednesday 01 December by Editorial Assistant

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