Recent Developments in the UK Housing Market - Essay Example

RECENT DEVELOPMENTS IN THE UK HOUSING MARKET Table of Contents Answer 3 Answer 2 3 Answer 3 4 Answer 4 6 Answer 5 7 Answer 6 8 Answer 7 10 Answer 811 Answer 9 12 Answer 10 13 References 15 Answer 1 During the period starting from the year 1998 to 2007 there had been a significant rise in the house prices in UK which had a growth rate of around 11% annually. This price rise in the UK housing sector was different from other house price rises because the there was a surge in the real prices even when the rise in inflation rates were comparatively low. This unprecedented rise in house price was followed by significant fall in 2008 because of the impact of Global Financial Crisis. The average house prices then got reduced by around 13%. However, a significant portion of these losses were recovered in 2010. Then again the UK economy had to face recession in the last two years which had an impact on reducing the UK house prices and at present they are still below the prices which were observed previously before the onset of GFC (Bardhan, Edelstein, & Kroll, 2011, p. 176). Next if we look at the regional differences in UK related to the changes in house prices it can be observed between 1998 and 2009, most of the regions in UK showed a similar pattern of rise and fall of housing prices. Northern Ireland and Scotland were the exceptions which showed slightly different patterns in price changes because of reasons like different types of housing market in these regions and lower starting level of house prices. However, post 2009, the growth in house prices was observed to be regionally diverse in UK. Highest growth in house prices which were significantly higher than the average UK housing prices were observed in London area followed by the South East region in UK. It is mainly attributed towards the low interest rates and increasing demand of housing property as an avenue for investment (Higson, 2011, p. 83). Answer 2 In general house prices must behave in a similar manner as that of inflation rates prevailing in an economy. However if we consider the recent boom in housing prices in UK since the year 1998, it can be observed that the housing prices behaved in an opposite direction to that of the general inflation rate of the UK’s economy. It implies that there has been a significant rise in the overall house prices of UK since 1998 but the general inflation was on the lower side and did not rise that significantly as compared to the house prices. It means that although the house prices rose significantly the prices of other goods and services did not rise that much. Next if we look at the relation between the house prices and income of the households in UK it can be observed that the house prices increased at a greater rate than the income of the households during the period of recent housing boom. If we look at the current affordability of the houses in UK it can concluded that the house properties are less affordable because of the high house price to income ratio at present. It implies that the UK households do not have enough income to be able to buy houses which are of high prices. Moreover the house prices are directly linked with the changes in income levels of households because most of the houses are bought through mortgage services offered by financial institutions. Hence it is very unlikely to get loans to buy houses with lower income levels. This is how the house properties became less affordable for people who were having comparatively lesser rise in income levels as compared to the rise in house prices in UK. Answer 3 There has been a significant rise in the demand of houses in UK during the period of 1998 to 2007. There are various factors which led to this increase in housing demand like increase in disposable income, lower interest rates, and increased availability of mortgage finance. The wages have increased at a faster rate than inflation from 1998 to 2007. Now since the households have the tendency to spend a certain proportion of their income levels on housing, the demand for housing also increased proportionately with the increase in income of the households. A major proportion of the houses are bought using the means of mortgage financing in UK. Thus the increased availability of mortgage advances offered by different financial institutions in UK also led to the rising demand for housing. The availability of lower interest rates for the households also attracted them towards borrowing larger sum of money to buy house properties in UK. Lower rate of interests meant the households with a certain level of household income were able to afford to borrow more and sustain a higher amount of housing mortgages. As regards the demographic changes in the housing market it can be observed that the average age of the first time buyers have increased since the year 1998. It implies that younger people did not opt to buy houses. These were some of the major factors which led to the increasing housing demand in the period 1998 to 2007 (Hallett, 1993, p. 69). Figure – 1 Ratios of price/income and advance/income Source: ONS House price statistics Answer 4 The price elasticity of housing supply is observed to be much lower in UK as compared to other advanced countries like US, Canada, etc. The price elasticity of housing supply in UK which was recorded to be around 0.395 is almost inelastic in nature. It means that the housing supply do not correspond with the pricing changes of houses in UK. One of the major factors behind this low price elasticity of housing supply is the prevailing regulations in various regions in UK which prohibit construction of houses (UN-Habitat, 2012, p. 80). Supply of available land is also a major constraint in UK and the significant rise in land prices reduces the profitability of constructing houses (Clark, Gibb, & Clapham, 2012, p. 263). This constraint in land availability in UK is mainly attributed towards the increased population density in various parts of UK, especially in the South (OECD, 2011, p. 67). Price Elasticity of Demand (PED) = % change in quantity or demand of house % change in price of house This price inelastic nature of housing supply in UK was institutional in the significant rise of UK’s house prices between 1998 and 2007 because there was a significant rise in demand of houses during this period but the supply of houses remained almost constant, hence resulting in significant rise in house prices. Thus when the supply is inelastic then in situations where the demand goes up, the supply of the product is not sufficient to fulfil the demand. Hence people try to obtain the product at higher prices. This phenomenon was institutional in case of the steep rise in housing price in UK as a result of price inelasticity of housing supply. Figure – 2 Inelastic Supply Curve Source: (Author’s Creation) Answer 5 A sudden rise in mortgage repossessions and arrears might result in a significant decline in the housing prices because increased arrears or repossessions are a consequence of the inability of households to repay their mortgage loans. Hence the increased number of repossessed houses in the market results in sudden increase in supply of houses in the market thereby reducing the demand for houses. With the decrease in demand of houses in the market their prices also tend to decline significantly (Great Britain: Parliament: House of Commons, 2011, p. 4). It has been observed that the number of mortgage repossessions have been on the lower side in the recent Global Financial Crisis as compared to the 1990s. The main factor responsible for this change in behaviour is the sharp decline in the interest rates in the recent times. With the decline in interest rates, it has resulted in reducing debt burden on the household sector significantly. This was not the case during the 1990s when there was a rise in interest rates (Great Britain: Parliament: House of Commons: Treasury Committee, 2009, p. 121). Hence, the changes in monetary policy in the recent crisis as compared to the 1990s have resulted in this anomaly. Apart from this another major change in 2011 was that the unemployment rate increased at a lesser rate than was found in the 1990s. This resulted in the reduced mortgage arrears and repossessions in the recent financial crisis situation as compared to the 1990s. Figure – 3 RPI inflation and interest rates Source: Bank of England Bankstats and ONS Answer 6 There is a long waiting list for affordable housing in the UK mainly because of the problems faced by the UK economy related to shortage in supply of houses. The house prices in UK are observed to behave independently to the supply of houses because of the inelastic nature of housing supply in UK observed at that time. There has been a significant increase in the demand of houses in UK but the supply had been limited resulting in significant increase in house prices making them unaffordable in nature. The number of completed houses in UK has also went down significantly because of the prevailing credit crunch sequence after the GFC and low availability of commercial loans needed to fund new housing developments. In addition to this, various government initiatives to increase the supply of affordable housing have not been initiated as yet. In order to improve this situation the government of UK can take several initiatives like to immediately start the pending Affordable Homes Programme, promoting new house building developments, lending affordable and easier loans to house building firms, etc. Apart from this the government of UK can impose a price ceiling on the new houses sold in UK which will be within the reach of people and they can afford to buy the houses. Figure – 4 Numbers of mortgage advances and property transactions Answer 7 Over the last decade it has been observed that there is a significant decline in the number of first time buyers in the UK house property market. The primary reason behind such behaviour or pattern is the increased house prices in UK and lower income generation by the households which is resulting in affordability constraints for the first time buyers who are mainly from the younger generations. The increase in average age of first time buyers is also another major reason behind the fall in first time buyers. The breakdowns in the households have resulted in increasing number of returners who were once owners and occupiers of the households. It implies that they have temporarily moved to rented houses instead of staying in owned houses. Apart from this the quality of rented accommodations has also got enhanced due to the increase in buy to let investors in the real estate market of UK. The existing competition is also contributing towards keeping the rents of the houses down and thus making it affordable for people. Hence people are shifting over to quality rented hoses available to them at lower rents instead of buying house properties. First time buyers are crucial to UK economy because they serve as an important source of liquidity of the UK property market. First time buyers are mainly responsible for the greater number of transactions taking place in the housing property market. Hence, the declining number of first time buyers would result in decreasing house pries in UK. Moreover it would also result in increase the number of rented houses in UK thereby resulting in increase in demand and prices of house rents (Forrest, & Yip, 2011, p. 52). Figure – 5 Proportion of first time buyers in all house purchases Answer 8 The Coalition government in UK has taken several initiatives with the primary motives to reduce the volatility in the house prices and increasing the availability of affordable houses in UK. The government have tried to control both the demand side as well as the supply side of houses in UK by taking initiatives to make houses affordable for the buyers and helping the construction firms to build new houses to increase the supply of houses in the market. Some of the initiatives taken up by the Coalition government and how it can improve affordability have been mentioned below: New Build Indemnity Scheme: It would help to increase the number of house completions in UK and overall development of the housing sector, thereby increasing the housing supply and reduction in house prices. First Buy: It would result in increasing the number of first buyers in the country which would make the houses more affordable. Growing Places Fund: It would help in the growth and development of house building thereby increasing house supply and reduction in their prices. Great Britain Building Investment Fund: This would also result in the development of house building. Build Now Pay Later: This again would result in increased supply of houses thereby reducing prices and making them affordable. Land Auctions: This would increase the land availability thereby ultimately leading to increase in affordability. New Homes Bonus: This promotes affordable homes with higher bonuses for the local councils. Community Infrastructure Levy: This would also help in promoting new house building thus making them affordable. Answer 9 Volatility in house prices and reduced affordability of houses are the two major issues prevalent in the housing sector of UK’s economy at present. The government has already started several initiatives to address these issues. Most of the policies already taken up by the government are related to promoting the house builders to start building new houses to cater to the increasing demand of affordable houses in UK. Apart from these initiatives, the government can resort to other policies which focus on the first time buyers in UK. Policies which results in increase in first time buyers in the UK’s economy would ultimately result in increased transactions in the UK’s housing sector, thereby improving the liquidity crunch situation in the market. Other policies that can be taken up by the government should focus on creating avenues to increase the income levels of the households so that the house prices to earnings ratio goes down, thereby increasing the affordability of houses in UK. Moreover the government could introduce certain incentive schemes for the construction firms to build new houses so that the housing supply is enhanced in the market thereby leading to the reduction in house prices and making it affordable for people to buy them. Apart from this the government could impose a ceiling on the house prices so that it does not create pressure on the households because of the unaffordable prices. Answer 10 The case study presented a detailed study about the various factors related to supply and demand factors which were instrumental in the volatility of house prices observed in the UKs housing market. There has been an unprecedented growth in the house prices before the GFC which have fallen down significantly since 2007. However at present the UK’s government is taking several initiatives to address the various issues concerned with volatility in the house prices. If those initiatives become successful then it can be expected that the house prices in UK would fall in the forthcoming five years or so. However, the UK’s economy is still in its recovery stage from the disastrous effects of the latest economic recession. Hence the housing completions are not expected to increase that significantly because of the prevailing liquidity crunch situation in the economy. In addition to this the household numbers in UK are also expected to increase (Osborne, 2012). Hence, it would result in higher demand and reduced supply of houses in UK and result in an increasing trend of house prices over the next five years. As regards the changes in population the demographics of people is expected to change as a result of the rise in ageing population of UK. Hence the average age of first time buyers would further go up in the forthcoming years. References Bardhan, A., Edelstein, R., & Kroll, C., 2011. Global Housing Markets: Crises, Policies, and Institutions. New Jersey: John Wiley and Sons. Clark, W. A. V., Gibb, K., & Clapham, D. F., 2012. The SAGE Handbook of Housing Studies. California: SAGE Publications. Forrest, R., & Yip, N. M., 2011. Housing Markets and the Global Financial Crisis: The Uneven Impact on Households. Gloucestershire: Edward Elgar Publishing. Great Britain: Parliament: House of Commons, 2011. The Mortgage Rescue Scheme: Department for Communities and Local Government. UK: The Stationery Office. Great Britain: Parliament: House of Commons: Treasury Committee, 2009. Mortgage Arrears and Access to Mortgage Finance: Fifteenth Report of Session 2008-09. UK: The Stationery Office. Hallett, G., 1993. The New Housing Shortage: Housing Affordability in Europe and the USA. London: Routledge. Higson, G., 2011. Markets and Market Failures. UK: Economics Online Ltd. OECD, 2011. OECD Economic Surveys: United Kingdom 2011. Paris: OECD Publishing. Osborne, H., 2012. UK housing market flat despite London price rises. The Guardian. [online] Available at: [Accessed 08 October 2012]. UN-Habitat, 2012. Financing Urban Shelter: Global Report on Human Settlements 2005. Nairobi: UN-Habitat. Read More