Changes in House prices in UK over the Last Three Years - Essay Example

Changes in House prices in UK over the Last Three Years Introduction Over the last three years, there has been a tremendous change of the house prices throughout the United Kingdom. At first, the prices increased after the introduction of low interest rates. High demand in the short-run was experienced but the time taken to build houses is long. Supply for the houses was inelastic because the number of houses available to meet the demand were less than the demand itself. This was a very big challenge for citizens to purchase houses. It happens in that; the demand for houses has gone up from Q1 to Q2, but the quantity supplied has not changed and remains stable at Q1. This means the number of houses available in the market is minimal than the number of houses the buyers are willing and able to buy. This created a shortage for the houses, which is the difference between Q2 and Q1. According to supply and demand theory, when demand is high and supply is low, the sellers tend to increase the price of a commodity from P1 to P2. In the short run, supply in the house market is inelastic. Therefore, the increased demand translates to an increase in the prices of houses. The increase in prices results from the fact that the supply (Q1) of houses is not equal to the demand (Q2) of houses and this causes disequilibrium in the market (Higson, 2011: 81). However, the prices of houses in the long run have gone down. Several factors cause the decrease of the house prices. One of the factors leading to decrease in prices is that the government has ensured that interest’s rates of getting a loan are very low. This has encouraged investors to obtain mortgage loans at relatively low interest rate. This implies that they are able to refund the money with very little amounts of interest. Therefore, supply of houses has gone up within the period. When supply increases, the price of the houses go down since the supply exceeds demand. On the other hand, deposit rates of a mortgage have been high, and this leads to a decreased demand. As a result, there has been excess supply in the house market. Another factor that has led to the decreased demand of houses for the last three years is that the rate of unemployment has gone up. Reduced interest rates have resulted to losses in the financial institutions. These institutions have to lay off some of their employees. Therefore, many people end up losing their jobs and this increase the rate of unemployment. This increases the number of people without the ability to pay the high mortgage deposits (Vermeulen, 2003:37). This means that the number of capable buyers of houses has reduced. As a result, the demand for houses decreased yet the supply of houses increased form Q1 to Q2, yet the able buyers remain Q1 who are less as compared to the supply. Therefore, because of an increase in the unemployment rates, this is a cause of low demand in the house market. According to the demand and supply theory, when the supply increases and demand decreases, the price of a commodity falls from P1 to P2. Another factor that has led to falling of the house prices in UK is issuing of residues to investors in the house market. This has encouraged investors to build more houses hence increasing the supply of the houses. Increase in supply is subject to a reduced demand and a decrease in the house prices (Geyer, 2009:138). This increases the loss made by financial institutions because residues discourage investors from borrowing from the lending institutions. Finally, lenders continue making more losses. This leads to a high rate of unemployment when the companies continue making losses. All these discussed factors leading to the reduced prices are crucial and have relatively led to a decreased demand (Geyer, 2009:139). In the coming years, the prices of houses will continue going down. The reasons for the low prices are that people will continue losing their jobs, and this will reduce demand for houses in UK. However, though the mortgage finances availability will be high and interest rates relatively low, very few people will be in a position to purchase a home. Introduction of new cheaper construction methods will increase the supply of houses because investors will use less money to construct several houses. However, as a result, the houses may look unattractive and people may fear to purchase the houses because insurance companies might not be ready to insure such fabricated houses. This will reduce the demand for houses (Higson, 2011:83). Adoption of technology in construction of houses will increase the cost of building modern houses because skilled labour required is very expensive. Generally, when the cost of producing a house is high, the house price may go high, but the number of willing and able buyers is very low, the sellers will have to reduce their prices or else they will end up making losses after selling the houses. Therefore, UK is likely to experience a period of low priced houses because the supply will be excess as compared to the decreased demand of the houses (Great Britain et al, 2006:165). In future, old houses will lose their value because of the introduction of the modern houses whose demand will increase. The old houses will be selling at low prices and this will discourage the investors from investing in houses. Able buyers will be more attracted to the modern houses. This means that for the old houses, their supply will be high, but the demand will be low. Therefore, there is the need for the sellers to reduce the prices (Great Britain et al, 2006: 167). Monetary policy from economists’ perspective is the control of money supply in a country through altering the rates of interests. In UK, this has changed because the levels of unemployment are increasing and the interest rates are very low. It tends to increase supply of money to the citizens through the introduction of low interest rates. However, UK’s monetary policy aims at increasing the supply of money through reduction of interest rates via the lending institutions. However, this does not mean that people have more money because the cost of deposits is very high in that it becomes difficult for people to get the money. This has helped in ensuring that the supply of money is relatively low. Therefore, UK has changed from a contractionary policy, which aims at reducing money supply to an expansionary policy aims at increasing the supply of money to the public, which is being made through the lowering of interest rates. Fiscal policy aims at regulating money supply by altering the government expenditure. The budget of UK changed to a deficit as in the year 2009. The government’s expenditure is very high since it provides residues to the investors and takes care of the budget. However, UK uses fiscal policy when planning for long-term expenditure of the government. Through reduction of the interest rates, the public debt has reduced and but the governments deficit has increased because tax rates have gone very high (Lipsey & Chrystal, 2007:440). Conclusion A change of the house prices is subject to the supply of the houses and the demand. Disequilibrium in supply and demand has led to decreasing prices because supply is higher than the demand. House market in UK is a crucial factor that has led to changes in the government’s fiscal and monetary policies. House prices have gone down because of the reduced demand that results from the changes in policies. Lowering of the interest rates and increasing of the deposit charges has led lending institutions to experience losses, and at the end, many people lose their jobs. Therefore, unemployment is a factor that has contributed to the reduced demand, for very few people are able to purchase a house. Lowering of the interest rates has not helped to increase the demand but it has led to increased supply of houses and less demand, which contributes to the low prices because there is excess supply of the houses. Other factors causing excess supply of houses in UK are new, cheap building methods and technology. References Cullingworth, B & Nadin, V. 2006. Town and Country Planning in the UK. New York: Routledge. Geyer, S. H. 2009. International Handbook of Urban Policy: Issues in the developed world. Cheltenham: Edward Elgar. Great Britain: Parliament: House of Commons: ODPM: Housing, Planning, Local Government and the Regions Committee. 2006 Affordability and the supply of housing: session 2005-06. Stationary Office. Higson, G. 2011. Markets and market failures. Economics. Available from: www.economicsonline.co.uk [Accessed 16 Nov. 2012] Lipsey, R. & Chrystal, A. 2007. Economics. New York: Oxford. Vermeulen, W. 2003. Essays on Housing Supply, Land Use Regulation and Regional Labour markets. Amsterdam: Rozenberg. Read More