House Sales Rise as Prices Fall - Essay Example

Introduction The current economic meltdown can greatly be attributed to the financing made to purchase housing units. The continuous flow of credit to the sector not only increased the overall prices of housing units within the country but also put a lot of pressure on the prices to remain stable causing them to fluctuate greatly. However, the cyclicality of housing prices is a very complex and often difficult economic problem to deal with because housing prices cycles are not symmetric i.e. they show different cyclical patterns every time.

(Geffner, 2008). However, it is also been argued that over the long period of time, the patterns in the cyclical variations of the housing prices can be traced. Normally, the fluctuations in housing prices are related with economic activity. When economic activity heats up in any economy, the real estate sector start to respond to this change also by showing a tendency to adjust prices upwardly however, when the economic activity slows down the housing cycle start to show greater variations too with prices of most of the housing units started to decline.

However, what is also important is the fact that numerous research studies also suggested that the increase in pricing of housing  units is also linked with the location of the housing units. The so called momentum and reversion of the cycle of housing prices is therefore not only linked with the economic activity but also with the location of the housing units.(Capozza et .al. 2002). Considering the above factors, this research paper will study and analyse the question of why the housing prices in UK are subject to large cyclical variations?

Cyclicality of Housing Prices in UK As discussed above that one of the main reasons for increase in the cyclical patterns of housing prices is related with the economic activity therefore in order to clearly assess the cyclicality of housing prices, it is of great importance that the impact of economic activity on housing prices shall be studied first. When economic activity picks up with lesser inflationary pressures, the real income of the households increase therefore there is always a general increase in the disposable income of individuals.

With the increase in income levels, the standards of life increase also and people start to prefer more luxurious housing than their current housing therefore the general increase in demand for housing units increase thus putting pressures on prices to increase. However, when the economic activity slows down and due to inflationary pressures or other economic variables, the decrease in income level put downward pressures on the prices. UKs economic performance, over the period of time, has considerably improved.

UKs real GDP increased, on average, by 2.8% during the period from 2003 to 2007. Similarly, average increase in inflation has remained at 1.95 %.(Economist,2008).  This suggests that the UK has made considerable improvement in its economic performance. However, what is most important is the fact that the increase in economic activity resulted into cyclical patterns into housing prices in UK. (Cameron,2001). Similarly, the extension of credit to the housing sector has also contributed toward general increase in the pricing of the housing units.

With general liberalization of financial regulatory requirements, banks and other financial institutions also increased their overall lending to the mortgage market. This increase not only resulted into general increase in the valuation of housing units but also resultantly housing prices also went up. Further, banks and financial institutions, in order to minimize their large exposures in housing markets started to engage themselves into speculative financial derivatives markets. The increased activity into speculative markets coupled with the speculative activity in capital markets further pushed the prices to fluctuate greatly.

This is also evident from the fact that current financial meltdown in US has potentially decreased the speculative activity in UK also and prices have started to come down. According to one BBC report, the sales during the month of Oct 2008 increased because asking prices are greatly decreasing. (BBC, 2008). Conclusion Barker Report outlined some of the major policy actions in order to bring housing and land planning into broader ambit of policy making process. However, despite the cautionary measures suggested in the report there are still some of the critical factors which are contributing towards the cyclicality of housing prices in UK.

Credit extension to prime as well as subprime borrowers to buy housing units as well as general improvement in economic performances are two of the most critical factors behind the cyclical behavior of prices. References 1. Marcie Geffner. (2008). what drives housing cycles. Available: http://www.bankrate.com/brm/news/mtg/20080417-housing-cycles-a1.asp. Last accessed 29 November 2008. 2. Dennis Capozza, Patric Hendershott, Charlotte Mack, and Christopher Mayer. (2002). Determinants of Real House Prices.

Available: http://www.nber.org/digest/may03/w9262.html. Last accessed 29 November 2008. 3. Economist.com. (2008). Factsheet. Available: http://www.economist.com/countries/britain/profile.cfm?folder=Profile-FactSheet. Last accessed 29 November 2008. 4. John Muellbauer and Gavin Cameron. (2001). UK Housing Market Historical Background. Available: http://www.housingoutlook.co.uk/Papers/background.html. Last accessed 29 November 2008. 5. BBC. (2008). House sales rise as prices fall. Available: http://news.bbc.co.

uk/2/hi/business/7737507.stm. Last accessed 29 November 2008.