Revision: Deflation in Residential and Commercial Property
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Background:
There has been a period of steep and sustained deflation in the average prices of property in the UK. Commercial property is 40% down from the July 2007 peak and residential property is - on average - down by 20% since the peak in the autumn of 2007. Land Securities, Britain’s largest real estate company has just revealed a £4.7bn fall in the value of its investments. It’s retail properties fell in value by 37 per cent and fared only slightly worse than its stock of London offices, which were down by 34 per cent. The commercial property sector is suffering from a slump in demand and sharp rise in vacancy rates. Housebuilders have made big cut-backs to the number of new homes being built. Both commercial and residential property markets are experiencing excess supply.
As part of your revision identify and explain:
1/ Three reasons that might explain the decline in residential property prices
2/ Two reasons why commercial property is falling in value
3/ Falling house prices have an effect on the UK’s macroeconomic performance. Assess whether a period of falling prices will be beneficial to the UK economy in the long run.
Chart: Source: Bank of England Inflation Report
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