The British housing market collapses

The British housing market collapsing would likely bring down whatever government was in power. However, there would be no serious impact on democratic practice. We have seen housing and other markets collapse dramatically before in the West. The effects were primarily economic, and there were no threats to the political regime, for example, democracy. A housing market implosion would not create the pressure for military government that a North Korean nuclear strike would, for example. Rather, we would see typical calls for government intervention to prop up prices and the market. There may be calls for the UK government to buy houses directly, for example, or for the market to be more regulated. Alternatively, there may be demands to prevent hot foreign money from jacking up prices and sucking too much investment into homes.

It might be good for young people, as they might be finally able to buy a house, although I suspect that if really dramatic things are happening in the economy, they probably won’t have the jobs to buy a house anyway. The house prices aren’t going to just fall on their own, they’ll fall because something’s happened.

A collapse of the UK housing market would lead to the value of collateral (security) that banks hold for mortgages diminishing and, therefore, banks would be less able to recover loans in cases of default. To comply with regulatory rules, banks would need to boost their capital ratios and this would mean that they have to reduce their portfolios of loans. As all banks would try to do this at the same time, the value of loans in the secondary market would reduce and banks would enter into financial difficulties. This would lead to a reduction of available credit which, in turn, would make it more difficult for businesses to invest and for households to spend. If serious enough, this effect could lead the economy into a recession.

There is a scenario where interest rates start to go up, thereby reducing demand because people can’t afford to pay the same prices as they have been. If interest rates doubled or trebled, that would be significant. But it’s unlikely.

The markets would panic if the collapse was sudden. If Russian money withdrew, the recovery to pre-collapse prices would take years.

The financial markets would react very negatively and the shares of major banks would fall dramatically.

There might be inflation, but a bit of inflation is somewhat useful for stock markets. In terms of a long-term effect, financial markets tend to bounce back these days, especially as they’re heavily reliant on international business.

The social effects would be minimal: initial foreclosures and sales, followed by a pick-up as low prices brought consumers back. There would be no chaos in the streets.

Unemployment would increase and the availability of credit would decrease, thus making it more difficult for poorer people to make ends meet.

What you’ll see is, as has already started happening in London, people don’t move, they just do their house up at some point. For the UK housing market to crash, it’s likely that there would have been other major economic shocks simultaneously or in advance of it. So although the under-40s who are squeezed out of the market currently would, in theory, benefit from finally being able to buy a home, their employment prospects may also have taken a big hit, and the recession that would likely be triggering it could make it a zero-sum game for everyone. Given there is so much wealth in UK housing, it would have a general negative effect on consumer spending and sentiment.