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Troubleshooter

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  • 07/10/2002
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I am worried about what impact a full blown conflict in the Middle East could have on my firm. What would you expect the main knock-on effects in the housing market to be if a war erupts?

The argument for worrying about the economic consequences of an armed conflict in the Middle East essentially hinges on fears that it could push up oil prices.

Higher oil prices effectively represent a consumption tax on oil-consuming countries as people in these countries would largely maintain their levels of petrol consumption, consequently leaving them with less cash to spend on other items. In these circumstances, the impact would be to reduce economic activity in oil-consuming countries.

In essence, war in the region would only have a detrimental impact on global and UK economies if it proved to be extensive and sustained, and resulted in a more than temporary and significant hike in oil prices.

Potentially, such an outcome could result in rising unemployment in the UK, which would have an adverse impact on housing demand. The probability of this worst-case scenario looks low and moreover, the Bank of England would be likely to respond to such an unfolding of events by cutting interest rates, which would help to support the demand for housing.

In addition, it should be remembered the housing market is well-placed to withstand such negative affects.

Mortgage payments currently represent a lower proportion of earnings than at almost any time in the past 20 years. This means there is a big cushion to weather any storm.

Martin Ellis


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