Impact of Personal Finance on UK Housing Market - Essay Example

?Impact of Personal Finance on UK Housing Market Introduction The United Kingdom (UK) housing market is highly fragmented and involves heavy investment in form of individual household and properties for rental purposes. The housing market is very crucial for the UK economy and consists of high, medium and low income residential, shopping and industrial complex. Presently, the UK housing market resembles a great unsustainable economic bubble which is fuelled by the cash reserves of the overseas investors (BBC News, 2003). The high price valuation in the main cities of the UK like, London is no longer considered an attractive site for rental and permanent housing complex. The individual household and rental properties form the backbone of several institutional and investment funds and have majorly contributed to the UK economy. Presently, due to high price valuations in London property market, the real estate market has shifted to the outskirts of the country and is unable to pool in large amount of capital for investment purposes (Blackmore, 2003). The study will highlight the different facets of the UK housing market and the effects of the economic slowdown on the subcategories like residential, housing complex and other rental property. The fragmented housing market will provide opportunities to investors for not only heavy investment in the market but also to pool in additional expenditure for further business expansion purposes. The future prospects of fragmented housing market along with an insight into the structural change would be discussed in the study. UK Housing Structural Pattern, Government Policy & Impact of Personal Finance during 1999 to 2003 In UK, the procurement of the housing facility is largely facilitated by the financial risk and the structural pattern of the housing market. Apart from the traditional banks, UK housing market is financed largely by the large amount of investors from other countries (Fowler, 2013). The requirements for the strong growth in the UK housing market were largely dependent on the pricing of the residential and non-residential property. The UK housing market then consisted of submarkets and the quantitative analysis was the most common method to determine the market issues and segmentation. The UK housing market consists of owner, rental and industrial owners and the affordability concept is measured through econometric concept. The measurement concept is vital in understanding the future prospects of the housing market because it provides a rough estimate of the income and the disposable income of the household and the tenants. In UK, the residual income concept is used for estimating the monthly disposable income, after the payment of the monthly mortgage system. The affordability factor is largely triggered by the average income of the household individuals and tenant owners by computing ratio. However, huge crisis was seen in both the household and rental category during 1999 to 2003 due to factors like low income of the individuals, legal inability to purchase the housing property, instability in the tenure of security ownership and also the highly geared financial exposure caused by the price variations. Therefore, it is observed that the UK housing prices was largely affected by the hike in the customer prices and the household incomes (Macgregor, Lizieri and Ball, 2008).The UK housing price grew by 47 percent, consumer price by 12 percent and household sector by 33 percent during the tenure 1996 to 2003 (Macgregor, Lizieri and Ball, 2008). The high income elasticity of the individuals with respect to the increase in the price valuation of the household property is responsible for the growth in housing market. The level of mortgage debts on the household balance sheet which is relative to the disposable income of the consumers is also a major factor for the development in the housing market (Poon and Garratt, 2012). During the tenure 2000 to 2003, the growth in the housing market depicted variability and stability in the varying rates of the price valuations, which are subject to change due to the increase in the housing prices. It was then observed that the concerns whether the individuals would be able to meet the mortgage payments would be highly mitigated by the impact of the lower bank interest rates (McCord et al., 2011). The lowered interest rates triggered the increase in the purchasing power of the individual household through normal buying and rental mode. The affordability of the housing was quite unstable during this tenure as there were fluctuations of the price variables of the households (Poon and Garratt, 2012). The tenure during 2000 to 2006 saw the unstable demand in the individual and rental household because of irrational pricing methodologies. The overall hurdle decrease in the annual income of the individuals posed great amount of financial risk to the house owners because their mortgage payment was at risk (Thomas, 2000). The buyers of the individual household faced considerable amount of problems regarding housing deposit income and other mortgage related issues associated with the annual income (Newell and Sieracki, 2008).There were many other relative housing problems like the inability to identify houses for both purchase and sale purposes. This was one of the most important factors where polices, incentives and procedures related to housing supply posed to be a major problem in that given unresponsive market conditions. The rational pricing prior to the 1980’s and the systematic planning system was the major cause in the increasing sales during this tenure (Thomas, 2000). The investors chose from various portfolios of financial instruments for a structured product mix to track the UK property market. The financial tracker follows the consistent performance of the UK annual property index and also utilizes the structured time frame related to property investments. Prior to the 1980s, the investment companies were seeking at least ?10 and ?25 and a maximum of ?100000 (Thomas, 2000). UK Housing Structural Pattern, Government Policy & Impact of Personal Finance during 2003 to 2013 This period was marked with a mix of ups and down within the UK housing market witnessing profits and losses and also with the emergence of homogenous housing products. The housing products along with a transparent transactions market worth and valuations influenced the housing worth to a large extent (Winch, 2013). The individual housing worth differed to a large extent from the rental property due to the many rational pricing models that are used. Due to the economic slowdown the UK housing market saw the annual inflation and disturbed pricing scenario. The household income of the individual was on the decline leading to low demand of the housing properties in the urban and rural centres. Earlier the banks were eager to put in lot of investment and lot of effort in the UK housing property for yielding profits. However, the scheme backfired due to the low income in this sector. The banks were forced to ask for aid from the government which required them to sign up for the scheme in return of protection of their assets (Riley, 2005). As per this government scheme, the lender chooses to participate in the loan to value policy and put their eligible loans into the initiation of the scheme. The interest has been extremely risky so far because it required the 90 to 95 percent loan value policy. The government further helped by providing 130 billion pounds into the loan guarantee scheme which required special monitoring from the central government during the development of this scheme (Williams, 2013a). After the introduction of the government housing guarantee scheme, the UK housing market has well improved in the fourth quarter of 2013 to 2014. The government scheme was introduced to stoke the housing bubble and remove the deformities in the UK economy for growth and development purpose (Williams, 2013b). After the government housing guarantee scheme was introduced, the office of National Statistics revealed that the housing property valuations in the year 2013 were higher than the 2012 and there was a total valuation of ?247000. However, along with the demand, the prices in the housing valuations soared to 8.7 billion during the tenure January 2013 to September 2013. The national average housing price for both individual and rental property has decreased a lot leading to the demand which helps to buy credit scheme proposed by several banks. The situation of the UK housing market encompassing the individual and rental property has not completely solaced as the three total mortgages outstanding for the housing properties have decreased from 3.6 million (June 2012) to 2.6 million. This sharp fall not only led to the formulation of another plan for the clearance of debt capital but also helped in the lowering of the mortgage rates to switch the loans on repayment basis (The Telegraph, 2013). The supposed watchdog in the UK financial community, Financial Conduct Authority has taken serious step in the issuing of the interest. Figure 1: House Prices Annual Rate of Growth (Source: Aldrick and Hawkes, 2013) From the above graph it is observed that the housing scheme not only helped in decreasing the housing prices but also increased the repossession in the rental property land. The decrease was also due to the fact that the lenders were asked to pay only the capital sum at the end of the repayment term and tenure. The government has also increased the process of facilitation of the housing loans which have increased and doubled up to 15 percent in the last tenure. It is also observed form the graph that the government’s mortgage guarantee scheme of ?12 billion helped in stoking the bubble to a large extent. The house prices in the London during the period of August to September had reached to 3.8 pieces higher than the year 2011. The overall valuation of the housing arrangement in London was ?247000 which broke all the housing guarantee prices (Aldrick and Hawkes, 2013). The housing market also saw an increase in the annual growth rates which was almost to the valuation of 3.2 billion during the tenure June 2012 to September 2013. The housing prices in London witnessed an increase in the average price along with rental rates. This also led to increases the popularity of the bankers help to buy credit guarantee scheme. For example, the tracker index prepared by Goldman Sachs and the 56 percent stake acquiring by Morley Fund Management in ORN capital (for the capitalization of growth in the property market). Along with these reputed companies, there have been other brokerage companies those try to develop housing products to yield profitability in the UK housing market. Figure 2: Housing Pricing Index During 2004 to 2012 (Source: Aldrick and Hawkes, 2013) The housing price index not only signifies the wide-ranging housing price of the individual but also an estimated structural housing pattern in the future. It is estimated that the structural pattern of the UK housing complex would not be only fair but also the supply of the two and three stored household will increase. The rise in the household prices would only be followed, if there is a rise in the household income of the common people and an increase in the number of immigrants. With the emergence of the Household Guarantee scheme proposed by the UK government, an increase in the supply of the individual and rental property was witnessed in the following areas. Figure 3: Housing Supply During 2012 to 2013 (Source: Aldrick and Hawkes, 2013) There was an increase in the supply of the housing properties because of the sudden appropriation of investment pattern of the common people purchasing the property. One of the major reasons behind the growth in the system would be because the individuals would start investing in the household and rental property to a large extent due to the rationale pricing models and decrease in the pricing variations in many UK regions. Taking this in account, many security companies has started developing different models which would help to increase the asset management value and also keeping track of securities derivative. Reference List Aldrick, P. and Hawkes, S., 2013. Rate setter warns of 'elevated' house prices. Mortgage Introducer, [online] 15 October. Available at: < http://www.telegraph.co.uk/finance/personalfinance/houseprices/10380846/Rate-setter-warns-of-elevated-house-prices.html > [Accessed 20 October 2013]. BBC News, 2003. House prices and the future of homes - in graphics. BBC News, [online] 09 October. Available at: [Accessed 20 October 2013]. Blackmore, N., 2003. Returns from buy-to-let on the rise. The Telegraph, [online] 17 October. Available at: < http://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/10386272/Returns-from-buy-to-let-on-the-rise.html > [Accessed 20 October 2013]. Fowler, R., 2013. Market activity accelerates in September. Mortgage Introducer, [online] 21 October. Available at: < http://www.mortgageintroducer.com/mortgages/247881/5/Industry_in_depth/Market_activity_accelerates_in_September.htm > [Accessed 20 October 2013]. Macgregor, B., Lizieri, C. and Ball, M., 2008. The economics of commercial property markets. London: Routledge. McCord, M., McGreal, S., Haran, M., Berry, J. and Davis, P., 2011. The implications of mortgage finance on housing market affordability. International Journal of Housing Markets and Analysis, 4(4), pp. 394-417 Newell, G. and Sieracki, K., 2008. Global trends in real estate finance. New Jersey: John Wiley & Sons. Poon, J. and Garratt, D., 2012. Evaluating UK housing policies to tackle housing affordability. International Journal of Housing Markets and Analysis, 5(3), pp. 253-271 Riley, G., 2005. Housing market economics digital textbook. Boston: Tutor2u Limited. The Telegraph, 2013. Help to buy risks bubble if supply remains tight, warns Lloyd’s chief. The Telegraph, [online] 14 October. Available at: < http://www.telegraph.co.uk/finance/personalfinance/borrowing/mortgages/10376834/Help-to-Buy-risks-bubble-if-supply-remains-tight-warns-Lloyds-chief.html > [Accessed 20 October 2013]. Thomas, R.G., 2000. Indemnities for long-term price risk in the UK housing market. Journal of Property Finance, 7(3), pp. 38-52 Williams, N., 2013a. Aldermore expands broker mortgage team. Mortgage Introducer, [online] 18 October. Available at: < http://www.mortgageintroducer.com/mortgages/247896/5/Industry_in_depth/Aldermore_expands_broker_mortgage_team.htm >[Accessed 20 October 2013]. Williams, N., 2013b. Market activity accelerates in September. Mortgage Introducer, [online] 18 October. Available at: < http://www.mortgageintroducer.com/ccstory/247894/5/Two_advisers_banned_over_property_investment.htm > [Accessed 20 October 2013]. Winch, J., 2013. UK house asking prices hit record high. The Telegraph, [online] 15 July. Available at: < http://www.telegraph.co.uk/finance/personalfinance/houseprices/10179535/UK-house-asking-prices-hit-record-high.html >[Accessed 20 October 2013]. Read More