The UK Housing Market - Essay Example

? Economics of Housing Contents Introduction 3 Question (i) 3 Question (ii) 5 Question (iii) 9 Conclusion 12 Introduction Analysis of the tenure provides important lens to identify the housing market of UK. Some important differences that can be taken into account while analyzing the main tenures in UK are occupation of owner, private renting as well as social renting. Some of the differences that include are taxation, mobility, benefits, security of tenure, satisfaction and aspiration and effect on the global platform. Question (i) The proportion of households in tenure mix has changed drastically over the last hundred years. The two main historic junction points that can be identified are in the years of 1915-1919 and also in the year 1979. Occupation of ownership as well as social housing amplified their comparative size in the period of 1915 to 1979. At the same time the private renting contracted drastically. After 1979 till the early phases of 2000 owner occupation augmented at the cost of social housing. Since the year 1995 the comparative size of the private rented sector began to take the steep rising curve. The trends in tenure can be accounted to be the combination of political, economic as well as social drivers that played their role in the short and in the long run. Political transformations like supports from the local government and Rights to Buy interacted with the cycles of the economy to bring changes in attitudes to different tenures. The current trends suggest a mix in tenure of the housing system of UK. For the first time the comparative size of the owner occupied sector took the declining curve while at the same time the private rented sector took the oppositely sloping curve. The reason for such a drift may be the supreme numeral of households in owner occupation while the social rented sector remained stable. In the phase of 2005 to 2009 the number of households in the private rented sector augmented by more than one million households. The transformation in tenures are likely to emerge from the sources like households moving between tenures, the emergence of households in a certain tenure and the ending of households more frequently in a certain tenure. Since there is lack of evidence it is difficult to judge the forces behind the recent changes in the tenure mix. If the recent trends sustain in 2013 then the private sector is expected to be larger than the social rented sector. Forecasts also point to the fact that by the end of the decade one in every five households would be private renters. The forecasting trends are based on the continuation of the recent trends. The figures point towards quick changes in tenure mix but the figures do not state how quickly the changes would take place. The key drivers that forced the recent changes in tenure mix are depicted in the diagram below: (Pattison, Diacon and Vine, 2010, p. 5). The three pillars taken in the diagram are owner occupation, private rented sector as well as social housing. The panel above the key drivers are regarded to be the drivers that act to increase the relative size while the panel below the drivers act to decrease the relative size. The structures above the pillar of owner occupation are tax advantages relative to other tenures, political support, preferred tenure and the Right to Buy sales. The structures above the pillar of private rented sector are affordability relative to owner occupation, lifestyle changes increasing desire for mobility. The structures above the social housing pillar are financial stability, demand for social housing. The structures below the pillar of owner occupation are income constraints, wealth constraints and mortgage constraints. The structures below private rented sector are investment constraints, lack of political support, and tax incentive relative to owner occupation. The structures below social housing are Right to Buy sales and pressure on government spending. Question (ii) The report published by the HomeOwners Alliance states the owner occupation in UK is set to go below the level of 1988. The owner occupation rate witnessed a steep rise in 2002 at 69.7% while the rate fell to 64.7% in 2012. The report uses data from the Department of Communities and Local government. It shows that London is greatly affected with the rate of owner occupied houses going below 50%. The LSL Property Index revealed the average monthly rent to touch the all time high of 744 pounds for England and Wales in October, 2012. The rents in London have risen by 7% on annual basis. The decline in the home ownership is depriving the current generations from owning a roof above the heads which shatters the dreams and aspirations. The decline is preventing millions of people from leading the kind of lives they want to (King, 2012). With tumbling in the home ownership the housing market is in crisis while prices soared. The high prices of houses coupled with huge deposits and criteria for strict lending have forced home ownership to take the declining curve. The housing minister accepted the fact that they had failed to build enough homes but insisted upon the fact the government tried to reverse the process through massive planning reform as well as through massive programming. The National Housing Federation warned the housing market will fall into crisis and forecasts steep rise in the private rental sector. It blamed the under supply of houses in UK to be the reason. The Chief executive Director stated that it in the current scenario rents are raising while social housing waiting lists are at high record. The time calls for facing the dysfunctional housing market and take the appropriate steps necessary to revive the market. Ownership of houses is strictly becoming the assets of the wealthy class. Many are thrown out of the housing market and therefore options are becoming limited while the demand is setting the rents at large heights. According to Shapps the main reason for the decline in the demand for house ownership is the rise in the price of houses in the period of 1997 to 2007. In the period of ten years the prices almost tripled and become unaffordable for a majority of the population. However the minister cited the studies undertaken to prove that the prices were still affordable over the last 12 years. He did take into account that significant challenges exists for the first time buyers and the role of the government is to help them (Mulholland, 2011). The housing bubble best describes the failure of the government in the market of housing. The policies adopted by the government made the price of houses unaffordable and beyond the reach for the first time buyers. The situation was followed by fall in the interest rates. This put the house owners in a situation of loss in welfare. The buyers found themselves in bad investments and they wished to break the circle. The initiative of the government to open up prospects for the home buyers eventually ended up in a scary situation. The market failure targeted the new house owners who bought houses during the peak period. The harm stretched the arms and the capital owners lost their value of their capital particularly in housing related industries. Some of the schools of thought deny the existence of bubble and states the outcome to be the cause of real factors. The Keynesian school of thought stated the bubble to be the resultant as irrational exuberance. The third hold the real and the psychological changes that are caused by the manipulations in the monetary policies to be responsible. The Chicago school of economists view the assertion to a psychological flaw on the minds of the consumers that time called for intervention of the government. They put forward the opinion that if some of the people could have recognized the bubble they would tried to accrue gains from selling the houses at the inflated rate before the burst. Many economists subscribe to the view of psychological factors. Business cycle is referred to be the ebb along with flow of mass consciousness and emotions. The role of real factors cannot be ignored but the prime factors are psychological. The boom in the housing market was brought by the overconfidence of the people over the economy. The investors became risk lover. The speculative behaviour played its role. The decisions on investments are no longer based on the old rules and practices. In the modern era people are becoming more accustomed in making their investment plans more structural so that they do not have to bite the dust in the recent future the burst in the housing market has installed a sense of calculating risk into the market. People are now becoming more and more communicative and with globalization the process is easy. New routes of investment are on demand and therefore people are now inclined to take those paths. Actually people lost faith on the housing market after the scenario of the bubble. It cannot be ignored that the investment mania set the investment exposed. The investors are under the trauma that their investments will remain undetermined and the results will grow worse. But it can be accounted that if such kind of behaviour persists on the minds of the consumers the market will require no time to enter into another phase of depression. After reaching the peak in 2003 the rate of home ownership is on the decline. The proportion of fall in social housing has stopped at least in the short term. The private renters were not encouraged to buy houses. In the phase of 2010 to 2011 only 22% were forecasted to opt for new homes compared to 28% in the earlier year. The survey of 2011 found that the average weekly rents for private tenants are much higher than the social sector. Since most of the people have to live on rented apartments as the rents rise they have little amount of disposable income on their hands. The savings are not enough for those people to buy new homes. t\another reason that can be taken in the discussion is that housing benefit was paid to 63% of the eligible persons while the rate is just 25% of the private tenants. The following table depicts the trends in home ownerships in England for the period under consideration. (Heywood, n.d., p. 62). Some of the factors are can be included in the discussion are mortgage finance, lending for LCHO, equity withdrawal, overall effects of developments in the mortgage market, future mortgage market prospects, immigration, demographics and changing work patterns. Question (iii) The factors that can influence the attainment of home ownership have been discussed in this part. The reactions of the different sections of the population in the near future on home ownership will be concluded next. The relation between the price of houses and the level of income of the population will decide the fate of the housing market. The income of the households has remained relatively low compared with the house price. The limited housing shocks offered by the government through specific programs can be aimed towards attainment of high housing turnover. The access to the mortgage advisors due to complexity in the market structure will play its role. The advisors or the brokers are unaware of the existing housing market as the programs relating to the market as constantly changing. A complex eligibility criterion also exists in the programs. Due to this reason many brokers try to avoid the home ownership programs. The role of banks is important in this case. The banks will have to provide access to loans for the people who wish to buy houses. The government needs to create the optimal allocation for successful home ownership. In this context security in employment and financial stability are the keys. If the people are not scared to lose their jobs they will take the investment in buying new homes. The other pre-requisites are physical infrastructure, resilient community and maintenance capability. The current safety net lacks the capability to provide security to the home owners and time called for government intervention during the downturn. The attempt of the government to shift the responsibility on the individual through the means of insurance failed to taste success. The housing market can be expected to benefit from the fruits of responsible borrowing. Improvement in the capability of borrowers will act to be the catalyst in reviving the housing market. The authorities can play their part through development of online budget planning tools or provide wider service of money advice. The current section of population who holds the maximum proportion of home ownership is on the age group of 55 to 65 years. The post war boom boosted this proportion. The Right to Buy policy and the boom pushed the prices of houses downwards which opened up the ability for the middle class to afford a home for themselves. According to the Pensions Policy Institute the next few years will witness about 80% of the people earning their livelihoods on pensions will be home earners. The increase will take place in line with the rise in demographic significance of older people. The proportion of older households will rise from 24.8% in the year of 1971 to 30.4% in the year of 2026. The owner occupier households above the age of 65 years will constitute more than one-fifth of the total home owners by 2026. The shrinking size of households can be characterised as an important feature of the aging of home ownership. The households above the age of 65 will be smaller in average. They will either be single or couples with no dependent children. The following years are expected to see strong rise in the ownership of single person owner households. The percentage is forecasted to raise from136% in1971 to more than 4 million households in 2026. On the other hand the number of married couples’ over and above the age of 65 will get doubled to reach 3.2 million in 2026. The aging of the population of UK will be the one where outright ownership is the characteristic. The growth in home ownership took place as the retired or the households in the age bracket of above 65 years tended to buy more than one homes may be due to investment or leisure reasons. This added to the intergeneration ownership gaps between different sections of population of UK. Empirical evidence proved that more than one fifth of the people coming under the age group of 50 to 59 years own more than one homes. The following graph shows the growth of old households for England in the years to come. (Grifoith, 2011, p. 7). On the above graph the households aged 65 and above are denoted by the blue bars while the total households are denoted by the red bars. The graph provides a comparative study on the section of population gaining ownership from 1971 to 2026. From the graph it can be depicted that number of households gaining home ownership are on the rise right from 1971. The decade of 1981 to 1991 showed relative stagnant growth in home ownership for older households but picked up in the next decade. The decade of 2006 to 2016 is expected to huge growth in the ownership of houses for that particular section of population. It can be seen from the graph that the blue bar raised substantially from 2006 to 2016. Even the decade of 2016 to 2026 will also follow the same trend. Therefore it can be considered that ownership of houses will be more or less concentrated among the older group of population in the decades to come. Conclusion The last ten decades witnessed drastic transformation in proportion of house ownership. The private renting sector contracted at pace. The change in the attitudes of different tenures was brought about by the mix of political and social drivers. The private rented sector and the owner occupied sector were moving in exactly opposite directions. The five year phase from 2005 to 2009 the number of houses in the private sector increased to reach one million. The sources that played behind the scenario were movement of households between tenures, the emergence of households in certain tenures and ending of households more frequently in certain tenure. The social sector will surpass the private rented sector if the current trends continue. The three pillars that led to the tenure mix were owner occupation, private rented sector and the social housing. The diagram discussed above discusses the structures that from the upper and the lower parts of the three main pillars. The second paragraph discusses the key factors affecting the home ownership attainment. Data depicted on the above paragraphs shows owner occupation to go below that of 1988. The main reasons for the fall in home ownership are soaring of prices, shortage in the supply of homes and the criteria of strict lending conditions. The authorities accepted the fact that the prices of houses almost tripled within a decade. The affordability to buy a house was beyond the reach of the first time buyers. Arguments put forward by several researchers have been discussed in this part of the discussion. The last part discusses the demographic scenario of different sections of population to afford a house. The income level is of utmost importance in this case and the role of the government cannot be ignored. The graph provided shows the growth of old households to afford a house over the period under consideration. References Grifoith, M. 2011. The intergenerational crisis in the housing market. [pdf]. Available at: http://www.if.org.uk/wp-content/uploads/2011/10/IF_Housing_Defin_Report_19oct.pdf. [Accessed: 4th January, 2013]. Heywood, A. n.d. The end of the affair. [pdf]. Available at: http://www.smith-institute.org.uk/file/The%20End%20of%20the%20Affair%20-%20implications%20of%20declining%20home%20ownership.pdf. [Accessed: 4th January, 2013]. King, M. 2012. UK homeownership falls to lowest level since 1988. [online]. Available at: http://www.guardian.co.uk/money/2012/nov/16/home-ownership-lowest-since-1988. [Accessed: 4th January, 2013]. Mulholland, H. 2011. Home ownership 'to fall to mid-80s levels'. [online]. Available at: http://www.guardian.co.uk/business/2011/aug/30/home-ownership-fall-mid-80s-levels. [Accessed: 4th January, 2013]. Pattison, B., Diacon D. and Vine, J. 2010. Tenure Trends in the UK Housing System. [pdf]. Available at: https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&ved=0CDMQFjAA&url=http%3A%2F%2Fwww.bshf.org%2Fscripting%2Fgetpublication.cfm%3FthePubID%3D46C4A5EA-15C5-F4C0-99C662FE48B048B9&ei=yUrkUI3oKYXxrQfXjYGADA&usg=AFQjCNErdStCiNyAMGm5pRk7E1WxeKAIAQ&sig2=JGLdahgSGKaaqMUSWREfVA&bvm=bv.1355534169,d.bmk. [Accessed: 4th January, 2013]. Read More