How a Decline in Economic Growth Affects Property Markets

The costly credit and impact of inflation made retail suffer badly in 1990. In the major UK cities, low-income people hindered from entering into property market due to high-interest rates. As a result, there was an overall slowdown in the activity. There was a decrease in institutional property investment and returns reduced on retail investments. Schemes for new large stores were shelved or even canceled while existing store outlets were scaled down or closed in a bid to attract larger customer share from competitors. The picture was total contrast from the 1980s when companies invited the big names in retail developers to design unique themed malls on the latest retail and leisure ideas (Jacobs 1992:93). Thus the slump of property and construction industry provided an example as to how fast the market-led growth falls. The recession affected even the most promising construction schemes as their ratings were down and billions were wiped off the share portfolios. It was a blow to Thatcher’s vision of a Homeowner’s nation. (Jacobs 1992:94). Jenkins (1991 as incited in Jacobs 1992) finds a cyclical nature of the UK property industry. He studied the property market from 1960 and found that there was increased involvement of banks and pension funds with the property market. …
The property was then presented by developers as security to obtain bank loans (Jacobs 1992:95). The multinational companies have integrated the economies of different countries and changes of one nation are transmitted to others. At the same time, there are more stable interest rates and low economic volatility. But the low inflation puts the lender at risk of default while borrower may have some advantage ( Forest and Lee 2003: 163).
The property companies were also helped by the bull market which increased their funds needed for development. By 1991, the overseas banks had 43% funding of property industries. The property slump occurred as a result of the entry of foreign capital which made this sector vulnerable as it was dependent on borrowing (Jacobs 1992).
The current slump in the economy has affected the construction industry as can be assessed by a comparative account of construction and GDP. The latter is the most important indicator of a nation’s economic health but likely to decline by 2.9 percent in real terms over 2009 (The Centre for Economics and Business Research (CEBR)). It will be the biggest annual fall since 1946 when the country faced mass demobilization after the Second World War. It is forecast that industrial investments may decline by more than 15 percent in 2009 and pose the biggest risk to the economy while household expenditure is expected to come down by 1.8 percent in the Year.
The issue is that house prices started to fall even before growth started to slow down. In other words, there are many microeconomic factors reducing house prices. Therefore, the fall in economic output has aggravated these other factors that are now causing lower house prices.