A precipitous fall in UK real estate prices might have far-reaching consequences for the UK economy, impacting jobs, household consumption, investment and the UK current account, according to a senior university lecturer and associate professor at Sheffield Hallam University.
The UK’s overheated property market continues to burden the nation’s policy makers – alongside its homeowners and investors.
Ever-rising prices and a distinct lack of housing has prompted the Government to unveil a raft of measures in response.
£2bn for affordable housing and further land releases sound impressive, but in a country where the housing stock is valued at nearly £7 trillion, these moves could prove to be small fry.
Theresa May’s proposals came soon after London's house prices fell by the largest degree in 10 years, prompting fears over long term falls in property values.
While such sustained falls would undeniably be bad for investors, what impact would such a situation have on the wider economy?
According to Alexander Tziamalis, a senior lecturer (associate professor) in economics and a consultant at Sheffield Hallam University, the impact could be profound.
Discretion is increasingly the watchword of property investors and home buyers, as the effect of Brexit on Britain’s financial industry remains far from clear. Tziamalis suggests that the "greater fool" economic mechanism has been at work for some time: the notion that, while a buyer knows they've bought a property far in excess of its true value, they believe they can sell it on to another party, ideally for a large premium.
Tziamalis likens the phenomenon to the rare tulip trade in Holland during the 17th century, when the perceived value of certain flower bulbs could bag the seller enough profit to purchase a grand house.
In such a scenario, when prices begin to look unstable, many owners of a commodity might look to sell – at the same time.
The same could happen in London, argues the academic.
Much of London's buoyant property market relies on overseas investors. Indeed, 82 per cent of property activity in the capital was conducted by foreign investors in 2013.
But across the UK, the vast majority of properties remain in the hands of households – families who have no immediate or even long-term plans to sell up.
What would a big drop in property prices mean for them?
Tziamalis points out that the pension and investment bonds industries are heavily dependent on yields from the British property market.
The so-called "wealth effect" could also have a huge impact. This phenomenon works on the principal that when someone owns a high value property, they feel more financially secure and therefore spend more – and save less.
This ties into the fact that many people plan to rely on the value of their homes to fund their retirements.
Most wealthy nations are impacted to some degree by the wealth effect, but few more so than the UK, where growth is underpinned by continued consumer spending.
A drop of 10 per cent in UK-wide property values would amount to vast loss in national wealth.
Such a fall in property values and the connected issues of economic instability and inhibited consumption could impact how much positive foreign direct investment the nation can attract.
Continuing investments from overseas sources has to some degree kept the UK's vast trade deficit in a manageable state. If property values begin to wobble, that crucial investment cash could dry up.
Such a situation would push down property prices, but it would also affect the nation's GDP, impact tax income and further degrade the country's current account situation. Consequently, the UK's credit rating could be further reduced, making the government’s sizeable debt even more costly to service.
Tziamalis suggests that such circumstances could prompt tax rises to cover increased costs, triggering a domino effect comparable to "events in Greece".
Tziamalis talks of the country’s need to "wean itself off its property addiction", while preventing the collapse of such a valuable asset class.
But the government is in a tricky position: it’s hard to sustain house prices when so many people are struggling to get on the property ladder, or even find somewhere to rent that is within their budget. Moves to create a lot of affordable housing would by implication reduce property values.
In addition, Theresa May's proposed changes to tax relief for residential landlords could scare many investors away.
Tziamalis argues for continued "loose monetary policy"; re-introducing tax incentives for property investment; and formulating a workable strategy for saving the nation's financial industry in the face of Brexit.
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