The UK property market effect on the UK economy

There is no doubt the people of this country place massive importance on their property. Of course, the problem is, the fortunes of the UK economy and the UK property market are closely linked.

So much national wealth is invested in property, indeed 77% of households are privately owned. This is far higher than most of Europe, with France for example at 50%.

It is commonly believed the economic recession of the early 1990`s was led by the property crash of that time. So it seems it is a cycle that is to be repeated, as the current 2008/09 recession coincides with another downturn in the housing sector.

Conversely, as property prices rise, we see an increase in wealth, an increase in confidence and an increase in consumer spending.

A key phrase is `aggregate demand`.

Increased consumer spending leads to rising aggregate demand in the economy and consequently economic growth.

Interest rates are therefore vital in the performance of our property market and economy. However, I believe the timing of interest rate increase has to be precise this time, as inflation can take hold rapidly with such low rates.

The availability of mortgage finance will be more restricted than in the early 90`s, so we should assume any increase in property prices will be more gradual, compounded by the high level of unemployment.

Recent history shows us that property prices fell by around 30% in the early 1990`s, starting recovering in 96. By 2001, they had generally returned to pre-collapse levels. This rise continued until their peak in August 2007.

The UK`s place in the world`s wealthiest nations and largest economies has fallen to seventh from fourth in recent years. Mainly because our wealth is tied up in property valuation.

So, 2010 can be expected to be a property driven upturn in ecomonic fortunes, hopefully the growth will be more gradual (and sustainable) over the coming years.