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Deflationary economic environment: what happens to house prices?

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    Deflationary economic environment: what happens to house prices?

    So I have a question for you all.

    In a mildly deflationary economic environment, what do you think happens to house prices?

    Just thinking about it -

    Assuming the UK eventually has to follow suit with other nations and reduce the BOE rate below zero, this should mean that mortgage rates become very much more affordable, implying further that those with mortgages have more spare cash to spend. Those with large mortgages will benefit even more due to the lower rates. Greater affordability will lead to lower repossessions etc, which in turn should hold up property prices overall.

    But, in a deflationary economic environment, all prices fall - including asset prices - because the psychology of expecting lower prices takes hold: why buy a house today when you can buy it next year for 10% less. Why take on a large loan to buy a depreciating asset.

    I had always though that negative interest rates would force cash out of deposits and into assets such as property, due to loans being more affordable. I think I'm very much wrong on this, so I'm a little confused in reading up on this subject.

    Looking at the way of the world and if we are to expect negative rates, do we expect house prices to fall here?

    #2
    The interest rates are already low i.e. they won't go much lower, but in a deflationary environment people lose their jobs and wages go down, so house prices would drop.

    However if lower prices are driven by a lower oil price it's not really deflation. It's only deflation when it's due to demand i.e. people buying less because they have no money, not because the energy prices are cheaper.

    Lower oil price "deflation" might lead to higher prices, as you have more money left over.
    I'm alright Jack

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      #3
      If it's actual deflation from the money supply or amount of credit contracting, like BB said, it's all the way down.

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        #4
        No doubt the government will try all the tricks of the trade to 'boost' the economy, first out of recession, then from 'stagflation'.
        In order to effectively introduce significant negative rates, the currency will have to go electronic only - otherwise paper currency will appreciate in value (like the CHF does now). Not sure how well will that go with people?

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