The Impact of Debt on the Housing Market in the United Kingdom - Coursework Example

The Impact of Debt on the Housing Market in the United Kingdom The purpose of this paper is to address the question of whether or not debt is alwaysa bad thing specifically in relation to the housing market in the United Kingdom (UK) with specific reference to levels of personal debt, levels of home ownership and the role of housing associations. To answer this question this paper will draw on specific examples of market trends within the United Kingdom. Levels of Personal Debt and its Impact on the British housing Market In order to address this issue this paper will first identify what the level of personal debt is for the nation and then make predictions as to what direction the level of personal debt will be going in the near and long term future in the UK. This will be followed by a discussion as to what consequences having personal debt are for the people in the UK. Finally this section will conclude with a discussion as to what is the impact of personal debt on the housing market. According to Creditaction.org.uk (2009) the level of personal debt in the UK stood at approximately £1,458bn (October statistics). Building on this point, in an article by Pym (2009) it is the case that personal borrowing actually declined over £600 million over previous months and as of present personal debt in the UK now rests at approximately £1.457 trillion According to the CIA world Factbook (2009) the UK falls 50th on a list of 126 on a ranked scale of nations representing what percentage of total GDP is public debt which is debt owned by the government to holders of government debt instruments, estimated in 2007 to be approximately 43.60%. Keeping in mind that it is the fact that in recent months people have been paying off a significant portion of their personal debt one must also question why it is that this action is transpiring. One logical conclusion is that with falling interest rates the price of loan repayments such as mortgage payments would likely be falling. It could be the case that people would opt to repay their loans faster rather than spending it. According to the Telegraph (2009) UK homeowners have been paying down their mortgages for six straight fiscal quarters which as was argued by the article is largely owing to changing consumer preferences in the wake of falling house prices. It is often the case that when house prices are increasing people are more willing to increase the size of their mortgage and the opposite holds true when the price of a mortgage is falling. With all of these figures in mind one must question what will be the consequences for the individual people of the UK by amassing so much public debt. As it stands on a personal level, the paying down of personal debt can be quite good. As it is the case that for many individuals the interest rates on borrowed money can be quite high and if they are able to quickly pay down outstanding loans than it is often the case that that individual investors can reallocate funds in the future towards investments. However it may often be a bad thing to pay down your debt. As was argued by Weston (2009) there are four circumstances in which paying down your debt my not be in someone’s best interest. The first example highlighted is when people target the wrong kind of debt such as paying down a low interest or tax deductible loan as opposed to paying down a high interest credit card. Secondly it is the case that people may dedicate a great deal of money towards paying down a low interest mortgage in lieu of investing money for retirement (Which may yield higher dividends in the future). Thirdly some people reallocate money from savings and investments towards paying down debt when again it may be the case that this yields higher dividends. Lastly it may not be in the best interest to dedicate a large portion of their income towards paying down their debts when they are almost certainly going to be filling for bankruptcy in the near future. What does all of this mean for the housing market is probably mixed signal. As it is the case that the economic downturn has brought about historically low interest rates it is now more attractive than ever to purchase a home. However having said that it is now also the case that having people dedicate more of their money towards paying down their personal debt they are probably not interested in upgrading their home. So ultimately one could conclude that for first time home buyers this is a promising signal but for people with already established homes the opposite could hold true. In the Canadian context, according to Beltrame (2009) the nation kept a record high level of household debt (Closely mirroring the levels found in the UK) however the consequence for this on the housing market was not nearly as dire a situation as found in the U.S. Levels of Home Ownership and the Impact on the British Housing Market. To answer this question one should first examine the current home ownership rates within the United Kingdom and examine what the current trend is for what effect this level of home ownership has on the current home ownership market. Secondly this paper will demonstrate what past ownership levels have had on the impact of the British Housing market and make comparison as to what the current level of home ownership has had on the housing market. Lastly this paper will make predictions on to what the future level of home ownership in s expected and contrast this with what the current level indicates. According to the Hurst (2007) writing for the TimesOnline.co.uk it is the case that the current trend for home ownership within the UK has been in decline for the first time in over half a century at a level of approximately 14.6million dwellings in 2007. However having said that, it is the case that according to an article by Grice (2009) published in the Independent.co.uk it is the case that home ownership in the UK had fallen from 71% of households in 2003 to a level of 68% in 2009. Which ultimately is a trend that began in 2005, however one must question that with a declining level of home ownership in the UK what effect would this have on the overall housing market the price of houses in the whole of the UK. According to an article by Prosser (2009) The actual price of houses may continue to increase on the whole in the UK at an expected amount of 0.1% in December 2009 and perhaps even fall as much as 1% overall in 2010. Even if there is a level of growth in December this would not actually represent a level of growth but ultimately is a level that is below inflation and on paper represents a loss. In the past the home ownership levels in the United Kingdom have varied greatly. Whilst it is the case that there has been a higher percentage of the population enjoying home ownership, in the UK it remains the case that the overall percentage of home ownership in is declining. Furthermore it is often the case that people argue that home ownership is a method of escaping poverty in the western world however according to an article by Burrows (2003) it has been demonstrated that over half of people in poverty are home owners. Even with a declining value of home ownership it remains the case that According to the BBC in 2007 the overall housing market remains overvalued as compared to the long term average. What does the future hold for the future of the housing market of the United Kingdom? According to Conway and Gribben (2009) it is the case that the average homeowner in the UK has an estimated savings of approximately £200 a month as compared to this time last year. With incentives such as this may be that the prospect of home ownership at this time is much better now than it has ever been in recent memory. What this may translate to is an overall attractiveness of the housing market for new investors. As a consequence people may expect a new influx of perspective buyers to enter the housing market owing to the decreased costs of borrowing money and the overall lower cost of borrowing money. Having said that, it may be that a decreased price my not prove to be a catalyst for al investors and as such this trend may not hold true for all people. There are also a number of advantages to renting a property as opposed to buying a property in the UK. According to Lambert (2006) in a circumstance where buyers are faced with rising house costs renting a house is more economically feasible giving the property tax laws and general cost of upkeep of a property in the UK. In this case it would be more realistic for somebody to not assume a high level of debt should they be able to earmark an amount of money for renting a property. The Role of Housing Associations in the UK Housing Market To answer this question this paper will first define what is a Housing Association as well as what role they currently hold in the current housing environment. Secondly this paper will highlight what role housing associations held in the past. Building on this idea this paper will make predictions as to what role housing associations will hold in the future of housing markets in the British context. Quite simply, a housing association is an entity that regulates or provides affordable housing/social housing for people or entities in need. Historically speaking there have been and remain a number of housing associations in the UK such as the national Housing Federation which according to their website (2009) is a governing body that represents over 1200 not for profit housing bodies in the United Kingdom. It is little secret to anybody that has ever lived in the UK that housing as funded by the housing Corporation. As many housing associations may have a purpose that is outside the realm of a typical association, for the purposes of this paper the focus will be on associations that are dedicated to providing affordable housing to needy tenants. According to an article published by Harris and Marshall (2005) it is simply the case that the role of Housing Associations has been driven beyond their traditional role such as by providing functions like debt counseling, providing rent to own schemes or running on a shared ownership pattern. The study has generated results that indicate that a number of housing associations are getting into activities that are more community oriented and not entirely dedicated to providing affordable housing to needy people. In an article by the housing market centre for research and market intelligence (2006) in every market across the UK the percentage of housing association represented homes vs. privately rented homes has been declining year over year from 1999-2005. As such one could conclude that although housing associations do provide a valid service and ultimately do represent a path towards home ownership their role in securing adequate housing may be diminishing and as such one could conclude that their affect on impact personal debt and affecting the housing market could also be diminishing. What role do housing associations hold in the future of the United Kingdom? It may be that they hold a declining role as home providers and provide a greater role as service providers. Nevertheless their impact on the housing market whilst still significant seems to be of diminishing importance. Conclusion There is little question that the issue of whether or not debt is always a bad thing is tricky. In the case of the housing market in relation to personal debt it was demonstrated that with historically low interest rates people with a steady income stream are now better equipped to pay down their personal debt but with borrowing rates at historic lows it may be more beneficial for these people to reallocate these funds to more profitable enterprises. In regards to the level of home ownership and its effect on the housing market, there is little question that there is a declining degree of home ownership in the United Kingdom according to the evidence provided. With declining home prices it may be more beneficial for home buyers to purchase homes or contrarily they could capitalize on low interest rates by spending more money on other investments which should pay higher dividends. As was demonstrated in the paper it may be the case that housing authorities are playing a diminishing role in the housing market and as such their impact on personal debt as well as affecting the housing market could also be declining. References BBC (July 2007) UK housing market is overvalued. BBC NEWS/Business [online] Available at http://news.bbc.co.uk/2/hi/business/6922109.stm Accessed on December 30th 2009. Beltrame, J. (December 2009) Canadian housing Market Sound: Economists. Canoe Money [online} Available at http://money.canoe.ca/News/Economy/2009/12/18/12206701-cp.html Accessed on December 29th 2009. Burrows, R. (January 2003) Home-Ownership and Poverty in Britain. Joseph Rowntree Foundation [online] Available at http://www.jrf.org.uk/publications/home-ownership-and-poverty-britain Accessed on December 30th 2009. Centre for Research and Market Intelligence (2006) The Role f Housing Associations in the Intermediate Market. Sector Study [online] Available at http://74.125.93.132/search?q=cache:9OgDkghdI3IJ:www.housingcorp.gov.uk/upload/pdf/Sector_Study_HA_intermediate_market.pdf+diminishing+role+of+housing+associations&cd=6&hl=en&ct=clnk&gl=ca&client=firefox-a Accessed on December 30th 2009. CIA World Factbook (2009) Rank Order-Public Debt [online] Available at http://www.webcitation.org/query?url=https%3A%2F%2Fwww.cia.gov%2Flibrary%2Fpublications%2Fthe-world-factbook%2Frankorder%2F2186rank.html&date=2008-10-15 Accessed on December 29th 2009. Conway, E. & Gribben, R. (December, 2009) UK Mortgage Holders ‘Now £200 a Month Better Off’. Telegraph.co.uk [online] Available at http://www.telegraph.co.uk/finance/newsbysector/constructionandproperty/6805067/UK-mortgage-holders-now-200-a-month-better-off.html Accessed on December 30th 2009. Creditaction.org.uk (2009) Debt Statistics: December 2009. Available online at http://www.creditaction.org.uk/debt-statistics.html Accessed on December 29th 2009. Harris, D. & Marshall, D. (September 2005) The wider Role of Housing Associations. Housing Corporation [online] Available at http://docs.google.com/viewer?a=v&q=cache:Cz9FSixFT-sJ:www.dataspring.org.uk/Downloads/SS_43.pdf+what+role+housing+associations&hl=en&gl=ca&pid=bl&srcid=ADGEESgbJKdK7i6SijWSLCZl2z-2CrCMVxo-sJyMMPmL4_7y_AdLP3vf876k6rHtGaqe3d-DjjhwJj419C_6JbVa4MgGj9sR-IY7PxA4SX_4cyNhNBadBEA8F8AS74U46TSzUJlnFdFp&sig=AHIEtbQ_X_UFTBE9hlQVCYRnhqGop9HMSg Accessed on December 30th 2009. Hurst, G. (March, 2007) Home Ownership Slips Into Reverse for the First Time in Half a Century. TimesOnline.co.uk [online] Available at http://www.timesonline.co.uk/tol/news/politics/article1567419.ece Accessed on December 30th 2009. Lambert, S. (June, 2006) Don’t Buy, Renting is Cheaper. ThisIsMoney.co.uk [online] Available at http://www.thisismoney.co.uk/mortgages-and-homes/mortgages-features/article.html?in_article_id=409763&in_page_id=58 Accessed on December 30th 2009. National Housing Federation (2009) About Us. [online] Available at http://www.housing.org.uk/default.aspx?tabId=171 Accessed on December 30th 2009. Prosser, D. (December 2009) U.K. Housing Market Slows in December. The Independent.co.uk. [online] Available at http://www.businessweek.com/globalbiz/content/dec2009/gb20091229_777571.htm Accessed on December 30th 2009. Pym, H.(September, 2009) Personal debt dips for first time. BBC News. Available online at http://news.bbc.co.uk/2/hi/8231135.stm Accessed on December 29th 2009. Telegraph.co.uk (December, 2009) UK homeowners pay down mortgage debt for sixth quarter. [online] Available at http://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/6904883/UK-homeowners-pay-down-mortgage-debt-for-sixth-quarter.html Accessed on December 29th 2009. Weston, L.P. (June 2009) When Paying off Debt is a Bad Idea. MSN Money.[online] Available at http://articles.moneycentral.msn.com/SavingandDebt/ManageDebt/WhenPayingOffDebtIsABadIdea.aspx Accessed on December 29th 2009. Read More