Deflation generally refers to a persistent decrease in the general price levels. Some economists refer this to a decrease in the money supply and credit.
After seeing surging petrol prices and spiralling energy & food costs, many struggling home owners are welcoming a chance of a decrease in these prices. After all Christmas is around the corner and every one needs a break from money worries for a while.
No one, not even the economists, like inflation. So decreasing prices should be good news, right? Yes and no! Every thing is good but only in moderation.
Lowering prices is great but continuously dropping prices over a period of time means that there is a consistent lack of demand in the economy (i.e. deflation) – which represents a major problem for every country and every economy around the world.
A deflationary spiral is often associated with the Great Depression of 1930s America when unemployment reached 25%, i.e. one in every 4 people lost jobs. Many people lost businesses and houses to lenders via repossession. Even UK suffered from a period of deflation during the First World War (read more on deflation here).
Ominously, the great depression of 1930s America started with a banking crisis. With recent credit crunch, we hope that the history does not repeat itself again.
Deflation, or continued low demand is the symptom of a depressed economy and a depressed economy is frequently associated with falling asset prices such as house prices.
For a home owner, whether owner occupier or a landlord, depression posses two major problems:
- It represents falling asset prices, such as house prices
- It increases the size of a home owner’s debt percentage
So what can a home owner, or an investor do to protect themselves?
- Sell up now, anticipating further falls and then potentially re-enter the housing market when prices are even lower; or
- Hold on to your property and see if you pay down your debt some how.
This is probably not a good time to buy property simply because the further falls (or deflation in asset prices) are widely anticipated.
For the same reason this is not a good time to sell the property either, unless you must. However if you are facing financial hardship or looking for ways to stop repossession then that may be a different story.
Filed under: House Prices
