The ensuing steady rise in the prices of housing reaches a level where the landlords, banks and builders decrease their participation and eventually stop investing or speculating in land-values. Builders no longer manage to sell their houses before they are completed and the land prices in the real-estate business cease growing sufficiently fast as to attract any speculators. Few investors or banks are now funding house-building, although it is not the cost of their construction which has dramatically changed but that of the land. At this stage in the business-cycle the system is ready to collapse and it takes but a small external shock to cause this. It inevitably comes from a different economic source, which has an independent effect on the community.
Recently and as an example, a sharp rise in oil prices causes the speculative value of out-of-town housing to fall, due to the greater cost of motoring to the densely-populated centres of industry, commerce, learning and recreation. No longer is it desirable to reside where the more expensive travelling adds to the house-keeping bills. The reduced demand for this kind of real-estate lowers its price (and its rent), but existing mortgage payments remain unchanged and cease to be compatible. With the awareness of the speculative loss, a significant number of foreclosures follow and bank insolvencies result, the houses being sold off cheaply. As credit becomes harder to obtain, the recession of the associated economic activity spreads outside of this sector of the community unemployment grows and many more families are unable to pay their regular fees for the rental or mortgage of their more modest homes.
The news of bank loses from the foreclosures warns the savers, and many of them decide to transfer their money into non-interest paying current accounts or to withdraw it. The use of these sums by the banks is now inhibited, causing a "credit-squeeze" having high interest rates. With less money being spent, the productive sectors of the macro-economy reduce their prices so as to encourage the purchase of more consumer goods. But this does not overcome the problems of high interest rates on loans nor return the monetary commerce to its former level. Consequently the system enters into a depressed state, with substantially less macro-economic activity.
These experiences and the places or kinds of individuals that feel them are described below. The logical arrangement of this dissertation is complicated by the combinations of the various parties involved, together with the different ways that they are affected. The hardships caused by the slump simultaneously influence the macro-economy in four basically different ways.
2.1 Decreased Demand for Goods and Less Employment in Industry
The curtailed programme of house-building, the diminished credit and the reduced purchasing by would-be householders and other consumers, result in less economic activity and smaller demands for many kinds of goods items. The unit cost of their manufacture rises, whilst the available sums for their acquisition shrink and lower outputs are the result. After trying to stimulate the demand by reducing prices, the managers in industry and commerce are reluctant to retain labour with little or nothing to do. So they shorten the length of the working-day, temporally lay-off some of their workers and eventually have to dismiss them. Many manufacturing concerns fail to provide dividends on their shares which fall in value, whilst some companies cannot even manage to stay in business. The level of unemployment grows. Petty crime increases, due to the rising levels of poverty and boredom.
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