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Real Estate & Property: Valuation and Investment - Essay Example

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In the paper “Real Estate & Property: Valuation and Investment” the author analyses a dramatic hike in the property prices noticed during 1998-2007. This has led to an increase in the equity of the existing property or house owners…
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Real Estate & Property: Valuation and Investment
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Download file to see previous pages This shows that the property prices rose three times more than its initial value. This growth remains consistent by approximately 11 percent every year. However, with the commencement of global recession, the property prices fell suddenly and significantly in UK. According to ONS, the average price of property fell to ?190,930, which represents a drop of 13.2 percent from the peak prices during 2007. In 2010, UK property prices started recovering and the average price increased to ?210,599 in the middle of 2012, but still the prices are 4 percent below what it was before the recession. So it can be depicted that boom and recession are integral part of the property market and they are bound to show the effects. Figure 1 States the Gross Domestic Product (GDP), the growth of the annual property prices, and the disposable income of the household. Since the property prices has followed the same pattern, so it rose in good times and fell in bad times. This also depicts that the volatility of the property prices depends on the economic cycle and it has a larger impact that the GDP or the household income. Figure 1: The Cyclic Pattern of Property Pricing in UK Source: (Office for National Statistics, 2012) This study aims at scrutinizing the UK property market, its current state and also the prospects of growth in the future. Keeping in mind the objective of the study a discussion on the effect of property prices on the economy, housing bubble, prices, mortgage and projections for future growth in this industry would be done. The pro-cyclic effect of property on the economy of UK led to an increase in the prices of the houses, which also increased the wealth of the homeowners in UK. That is why they felt less need of saving money and spending them. The increasing property prices also led to increasing demand for homes which further improved the economic condition and supported growth. Similarly the lending frequency of the property buyers would also increase, but sudden fall the prices would reverse the economic growth by affecting the whole cycle adversely. A significant mechanism by which the householders boosted their spending is through montage equity withdrawal. It was stated by Bank of England, as can be seen in Figure 2, that till the late 1980s, the mortgage equity withdrawal rate reached about 8 percent after calculating income tax. However, in 2003 the rates cross 8.5 percent. Throughout this period of time the householders were taking the advantage of increasing household prices. Though the government of UK preached of developing a saving culture in the country, but the households have already developed a different culture, which can be also called a borrowing culture. Figure 2: Mortgage Equity Withdrawal (% post Income Tax) Source: (Bank of England, 2007) Mortgage finance is one of the most important components in the property debt market. It was seen that by 2009, the household mortgage debt sector in UK amounted to ?1.53 trillion, among which about 78 percent of the debts were secured, which was about ?1.19 trillion. A comparative study with the other countries revealed that the household debt ratio of UK compared to the income was more since 2002, as can be seen in Figure 3. UK was renowned because of their high level of mortgage lending, which was showed as a percentage of their GDP (81 %). The concentration of the mortgages was mainly towards residential property than the business or personal property. ...Download file to see next pagesRead More
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