The Challenge with UK Housing - Assignment Example

TMA 03: The assignment Part A (50 per cent of the mark for this assignment) Question What is the minimum contribution to the purchase of the flat that Janis and John would need to find as a deposit? (2 marks) The minimum contribution by Janis and John to the purchase of the flat is 20% of the value of the flat (20% of 140000), which amounts to ₤28000. The remaining 80% of the total value obtained by the valuation (80% of ₤140000) is approved as the loan to be granted. This amounts to ₤112000. What risks are they taking by buying a property at a price above a surveyor’s valuation? (3 marks) The decision to buy the house at the price above that of the valuation is an inflation of the interest rates. Additionally, the bank will not be willing to grant the loan to a figure above the stated property value. Paying more than the property value means that the buyer may not be able to have any equity in the flat, and hence, can’t sell it to recover the money. They are considering three options: Option 1: Janis would prefer liquidating John’s shares in order to pay for the minimum deposit. Option 2: John would prefer to pay the minimum deposit using Janis’s savings and then his shares for the remainder, Thereby keeping some of the shares to repay the mortgage, given his lower earnings. Option 3: They would both use all of their current savings and shares money as a deposit and borrow the rest with the mortgage. a. Using the Mortgage calculator from the Financial Tools in Study resources, what would be the monthly payments and total interest for both a repayment mortgage and an interest-only mortgage for the minimum deposit options (Option 1 and 2) on the one hand and for Option 3 on the other? (4 marks) For option 1, the monthly repayment is ₤ 1,024.09, while option 2 gives the monthly repayment as ₤1,055.83. On the other hand, the monthly repayment for option 3 is ₤1,124.63. Using their combined current savings and shares enables them to make a higher monthly repayment, at a relatively low interest rate (Glendenning, M, and Muthesius, 1994). The total interest for option 1 is 249.79 and that of option 2 is 329.15. On the other hand, option 3 gives the interest as ₤408.15. b.Why are the repayment and interest-only figures different? (2 marks) The interest rates differ because of the variation in the residual principal amounts at the end of every loan repayment. As the principal reduces, the interest charged also reduces; hence, the repayment amount also reduces. c.Briefly describe two factors that Janis and John might want to consider, either together or as individuals, when deciding between the three deposit options if choosing a repayment mortgage. (6 marks) One of the factors that they would consider in deciding among the three options include the rate of inflation, the mode of interest charging, whether fixed or variable, the period of repayment and the ratio of the value of the house to the cost. Inflation Rate The rate of inflation indicates the trend of growth in the rates of interest. It is easier to predict whether the value of the house will rise or fall in the near future. Option 3 is preferable for high inflation situation, while option 1 and 2 are preferred for low inflation (Maliene & Malys, 2009). Mode of Interest Rate Fixed rate imply that there is no effect on the option selected. Variable rate means the combined shares and savings in option 3 are preferred to minimize the interest charged through discounting. The Period of Repayment Longer repayment periods attract higher interest rates than shorter periods. Option 1 and two are preferred for longer repayment periods while option 3 is suitable in shorter periods. d.Briefly compare Options 1 and 2 when assessing the relative merits of a repayment mortgage, and an interest-only mortgage. (4 marks) Option 1 With option 1, Janis Liquidates John’s shares and hence pays minimum deposit. This implies that the source of income for repayment reduces, but the principal has reduced by ₤40,000. The repayment only amount will be ₤749.75 and the interest only amount is ₤350. Option 2 This option is more expensive as it only reduces the principal by ₤10,000 (Jani’s shares). The interest only rate is ₤455, while the repayment only amount is ₤887.54. Out of this analysis, option 1 is the preferred option. e. They discover that another lender will offer them a mortgage with an interest rate of 5.6% APR, fixed for five years. Describe two factors the two friends may wish to consider when thinking about whether to take out the fixed rate mortgage. (4 marks) (Total marks: 25 marks) John and Janis ought to know that the short repayment period pushes the repayment amount higher than the current amount, and reduces the interest rate as seen to reduce from 15% to 5.6%. The rate of interest is fixed, implying that no significant change on the interest only rate (Clark, 2004). Question 2 Helen is trying to make sense of her finances as she had some debt issues over the last three years and wants to be better equipped for the future. This is the information she gathered in July 2015 compared to July 2012 (in no particular order): Raw Table 2012 2015 Flat worth 200,000 0 Mortgage 180,000 0 Monthly net income 2,000 1,600 Monthly expenditure 2,100 1,100 Cash ISA 1,000 3,000 Current account 1,000 1,150 Overdraft 1,000 3,000 Credit card 5,000 1,000 Personal debt due for repayment in 2017 5,000 5,000 Shares 5,000 1,000 Draw up a balance sheet distinguishing between liquid assets and short-term liabilities and other types of assets and liabilities for each period. (8 marks) Balance Sheet   AS AT 31/12/2012 AS AT 31/12/2015           Fixed Assets         Flat worth 200,000   0   Mortgage 180,000   0     380,000   0   Current Assets         Cash ISA 1,000   3,000   Current account 1,000   1,150     2,000 382,000 4,150 4,150 Long term Liabilities         Personal debt due for repayment in 2017 5,000   5,000     5,000   5,000   Short Term Liability         Credit card 5,000   1,000   Overdraft 1,000   3,000     6,000 11,000 4,000 9,000 Shares 5,000   1,000   Add profit/Loss -100   500     4,900 15,900 1,500 10,500 Capital   366,100   -6,350     382,000   4,150 Using the Balance sheet analyser, calculate financial net worth, gearing and current asset ratio and explain what they tell us about how Helen’s financial situation has changed over the last three years. (6 marks) In 2012 Net worth Net worth = assets - Liabilities Net worth = 382,000 – 11000 = 371000 Gearing Gearing = (5000 + 1000) / (5000 + 5000 + 1000) = 0.545 Current Ratio Current ratio = 2000 / 6000 = 0.33 In 2015 Net worth Net worth = assets - Liabilities Net worth = 4150 - 10500 = -6350 Gearing Gearing = (5000+ 3000) / (5000 + 1000 + 3000) = 0.88 Current Ratio Current ratio = 4150 / 9000 = 0.461 Briefly describe three financial adjustments Helen could make to improve her situation in the near future. (6 marks) Hellen would have to increase her current Assets such as cash account and the current account. These two are the chosen assets for improvement because they also determine the liquidity of the company (Fernandez, 2015). At the same time, Hellen has to reduce the liabilities such as the credit card loan and the long term loan. Briefly compare the financial challenges or opportunities Helen would face as a 34 year old in 2015 as opposed to a 64 year old in 2015. (5 marks) As a 34 years old, Helen has opportunities to grow in Business and career because of her young age and fewer responsibilities than at the age of 64 years. (Total marks: 25 marks) Word limit for Part A: 800 words Part B (50 per cent of the mark for this assignment) How might the UK property market in 2014 impact upon the housing choices facing different households? The challenge with UK Housing About 5 years after the beginning of the global credit shortage in the UK, housing became out of reach of many citizens. The paradox of the UK Bubble makes the UK experience 5 years of financial depression, with citizens turning to renting rather than buying houses (Maliene, Howe & Malys, 2008). This is an epitome of the unbalanced economic power in the UK, which has a dropping real income and at the same time, continuously inflated property prices. Figure 1 below illustrates that indeed the UK has a property bubble. Figure 1: Housing Prices in the UK Many parts of the country still fall lower than the pre-crisis peak point. The main trouble is in London. With the property bubble, the National Statistics displays an average price of London properties to be rising by about 12.5% in up to 2013 (Mulliner & Maliene, 2013). The behavior of London houses in the market slowed down the prices and the rates of inflation from 3.4% to 5.7%. Luxury housing facilities are also seen to increase in prices very fast. Reasons for the Sharp Increase Supply The number of UK families is increasing expressively quicker than the rate of growth in the housing supply. There is therefore a pressure to push up the prices. The property supply explains the sharp difference between housing issues in the US and in the UK (Chamberlin, 2009). Demand from Speculative Investors In spite of the housing prices, the idea of acquisition is considered a very good idea and a good investment. London specifically attracts foreign investments seeking to purchase properties. Inelastic demand The limited housing opportunities imply that there is no attraction in the other options such as renting or buying due to financial consideration. Nevertheless, despite prices, some buyers are determined to buy even through debts. Governments Assistance The UK government has faced criticism from some analysts in its decision to help Buy scheme. This scheme assists the first year purchasers of product get mortgage, by creating sustainable designs. With the help of the government, at least 150,000 extra house units have been built as a temporary solution (Mack, 2009). Solutions to UK Housing Challenges Confronting the supply shortage Nevertheless, the supply shortage is not going to disappear by wishful thinking. Given the political and environmental difficulties of building on green belt land, there needs to be a rethink of how to build high density housing on ‘brown field’ sites (Bramley, 1994). Public Housing The desperate housing shortage faces the private sector more than any other segment. Government assists the public servants to with higher priority. The public sector houses assists in the building of cost effective residential according to the prevailing needs. Restrictions Against Foreign Oversea buyers are interested in purchasing second homes. This affects foreign buyers of the properties in the UK. The government therefore has to enforce the pricing by increasing the taxes for foreign buyers. This is likely to level the properties. References Bramley, Glen (1994). "An affordability crisis in British housing: dimensions, causes and policy impact". Housing Studies (Taylor and Francis) 9 (1): 103–124. Mulliner E, Maliene V (2013). "Austerity and reform to affordable housing policy". Journal of Housing and the Built Environment 28 (2). pp. 397–407. Maliene V, Howe J, Malys N (2008). "Sustainable communities: affordable housing and socio-economic relations". Local Economy 23 (4). pp. 267–76. Chamberlin, G (2009), "Recent developments in the UK housing market" (PDF), Economic and Labour Market Review 3 (8): 29–38, Fernandez, J. (2015). "London Housing: UK Relocation Spotlight". http://gmsmobility.com/. Global Mobility Solutions. Retrieved 14 January 2015. Clark, R. (2004). "Market watch: new homes". The Daily Telegraph (London). Maliene V, Howe J, Malys N (2008). "Sustainable communities: affordable housing and socio-economic relations". Local Economy 23 (4): 267–76. Maliene V, Malys N (2009). "High-quality housing—a key issue in delivering sustainable communities". Building and Environment 44 (2): 426–30. Glendenning, M, and Muthesius, S (1994), Tower Block: Modern Public Housing in England, Scotland, Wales, and Northern Ireland. Mack, Jon (2009), "Anti-social Behaviour Act 2003: Part 1A closure order", CL&J 173: 116–117. R. Burdett, T. Travers, D. Czischke, P. Rode and B. Moser, Density and Urban Neighbourhoods in London: Summary Report (Enterprise LSE Cities, 2004), pp. 13-14. Read More