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keep property rates high by limited supply.

2. Changing interest rates: Most homeowners in UK choose variable interest rates for their debts this means if there is a small change in Bank of England interest rates it changes the monthly repayments. If there is an increase in interest rate people find it difficult to pay mortgage and are forced to sell their houses

Housing Boom

In late 80s there was boom in housing due to low interest rates and consumer confidence. Housing rates increased by 300% .The boom in housing fuelled economic growth and large capital withdrawal is seen during that period. But when these rates increased it was costly for those who bought property their wealth went down. In 1989-90 economy was growing at the rate of 5 %but it increased inflation to 11% in 1990

Housing market crash of 1992 and 2008

There was a boom in housing market till 1990 and it was followed by a crash during 1992. The difference between late 80s and early 90s was that the economy experienced a inflationary boom. The economic growth reached over 5% but it was accompanied by a rise in inflation to 11%. The government decided to join ERM (exchange rate mechanism) to control inflation but this required a rise in interest rates which peaked to a level of 15%. At 15% rate mortgage became very expensive. So there was a record rise in defaults and repossession. People stopped buying houses and prices fell by 15% forcing the government to leave ERM. But till that time prices had reduced considerably. After that period Bank of England maintained low and stable interest rates which enabled low inflationary growth and low interest rate and a rise in housing price of more than 200%.

Economic impact of housing crash

Fall in housing prices not only affects individual house owner it causes serious consequences for economy also. Some of them are:

1. Negative wealth effect: When property value went down people sold their assets and those who bought just before crash ended with negative value of wealth. People were reluctant to borrow and spend they tried to increase their savings which led to a significant fall in spending caused by equity withdrawal.

2. Fall in Aggregate Demand/Economic Growth: Because of lower spending there is decrease in aggregate demand and housing is the significant determinant of spending in economy. Consumption accounts for 66% of AD and housing is by far the biggest wealth. Fall in AD and spending leads to lower economic growth and increase in unemployment.

3. Lower inflation rate: Reduced spending decreased inflation rate. This enables to cut interest rates and maintain interest rate low.

Effect of housing price on consumption

Housing is the main component of wealth for the typical household in the UK in mid 1990s it was 35% of aggregate household wealth. There is correlation between house price and consumption through wealth effect. Three main mechanisms to explain this co-movement are:

1. A “wealth effect': increases in house prices raise households' wealth, raising their desired level of expenditure. According to Campbell and Cocco, increases in consumption observed during recent house price booms, were mainly driven by increases in the consumption of home owners (rather than renters) and older consumers rather than younger ones.

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