Economic Report: The Scottish Housing Market - Coursework Example

Table of Contents 1. Introduction 2 3. Part 2 4 4. Part 3 9 5. Conclusion and recommendations 10 References 12 1. Introduction This report will first provide an analysis of the economic framework of the Scottish housing market over the last 10 years. The analysis has been provided using economic tools of supply and demand which explain the reasons behind the volatile nature of the housing market. It also explains how this volatility is detrimental both in terms of efficiency and distribution. The next part of the project analyses the housing market of Scotland since 2000. It explains the housing price trends, transactions, lending and new builds. Similar data have been provided for the United Kingdom as well. The final part of the project explains the distinguishing factors influencing the housing market outcomes in Scotland and that in UK. It explains at what level the housing market activities have been recovering in Scotland and UK. Based on this difference, recommendations are provided which – if implemented by Scottish Ministers - could bring about increased stability in the nations housing market. It is ensured that the policies recommended are cost effective. 1.2. Part 1 Majority of the properties are owned by households. In spite of the enormous size of this market, many people may be unaware of the factors that lead to house price increases within different areas. Growth management planning has made housing not only less affordable but has also increased volatility of house prices1. A small amount of restrictions in the supply of houses can bring about exceedingly high house prices. Small decreases in the demand for houses can also result in an increase in their price. Studies reveal that in the past 30 years, the housing prices in America have grown at a 1% faster rate over its rate of inflation. But places which depend highly on growth management planning have shown great fluctuations in house prices. Places like California, Oregon and New England have shown great zooming up and down of house prices (O’Toole, 2007, p.127). Growth management was also practiced in UK which has been effective in influencing the direction of the industrial sector and for anticipating areas of opportunities and development. Under this circumstance, new investments could be made and growth opportunities could be exploited (Rodrigue, Slack & Notteboom, 2011). Inflation adjusted prices are subjected to greater fluctuations over a period of time. For example, in California, housing prices grew by 60-70% in the 1970s, and fell by 5-10% in the 1980s. Again at the end of 1980s prices rose sharply. In the 1990s prices fell and then rose again in 2000. It is expected that the price will fall again over the next five years. Studies reveal that volatility of price bears a direct relation with the land regulations. Growth management was followed and practiced in Britain in 2005 which showed that planning led to the growth in prices, but simultaneously it also caused the markets to become volatile as well. This volatile market was susceptible to “booms and busts” in the housing market (O’Toole, 2007, p.127). The reason why land regulations make housing prices more volatile is because employers try to move away from the areas of high costs or they prefer to choose a place where the employees could buy homes at low, affordable prices (O’Toole, 2007, p.128). Generally house prices are determined by the economic forces of supply and demand prevailing in the market. House prices may increase by the rise in disposable income resulting in the upward shift in the demand curve. Prices may also increase by the shift in the supply curve resulting from the increase in the construction costs. Government intervention in the market price of houses may correlate with inefficient resource allocation. However, government regulations are not as powerful to change market prices as the demand and supply forces due to the changes in disposable incomes and construction prices (Chow & Niu, 2009, p.2). The planning legal professionals have often blamed the house affordability issues on demand. Paul Danish – a Boulder city councillor - has a different view on this. According to him, irrespective of the demand, “the cost of existing homes is limited by the cost of building new ones” (O’Toole, 2007, p.133). Labour is a mobile factor and its cost varies greatly from region to region. But the variation in the living costs between two regions can be attributed to the variation in housing costs in the two regions. Thus it can be said that high labour costs result from high housing costs, but they cannot be considered to be the cause (O’Toole, 2007, p.133). However, land is immobile and plentiful. It is found more than labour and materials. Suburban land is one of the major components of the costs of housing (O’Toole, 2007, p.134). 1.3. Part 2 The credit crunch made the first and the most significant impact on the housing market in 2009. This is because at this time banks made it difficult for people on insufficient incomes to borrow money. The UK economy has, at least in part, arguably recovered from the effects of the recession, but housing prices and activities in the housing market remain lower than that in 2007. The average prices of houses have shown a small decline in the previous quarter. According to the reports, the annual average price of houses in Scotland has increased by the range between 4% and 5.6% (Burgess, 2010, p.3). This is a little less than that prevailing in the United Kingdom. There also seems to be great variation in the average price of houses across different areas of Scotland. Edinburgh is said to be the most expensive in terms of the price of flats while properties in Fife have the lowest value. Various government schemes were initiated in favour of the first time buyers and the homeowners of Scotland and are still continuing (Burgess, 2010, p.3). The variation in house prices across various regions of Scotland is shown in the figure below. Figure 1: Scotland Regional House Prices (Source: Burgess, 2010, p.5) The sale of houses in Scotland began to fall since 2007 and the trend continued till 2008. However the trend started to change gradually since 2009 when the sales volume began to rise. The quarterly and annual change in the sales volume in residential areas is shown in the following table. Figure 2: Residential Sales volume in Scotland (Source: Burgess, 2010, p.6) Due to the economic downturn, the house building industry witnessed a setback as the number of new houses to be built fell sharply. This resulted in a number of job losses in the housing industry. According to estimates, 46,800 numbers of jobs were lost since 2008 in the industry. There were huge skill loss and lost capacity. In 2009, 16,273 houses started to be built across all sectors in the country. This figure is 25.8% lower than that in 2008 which is 39.4% lower than that in 2007. The following figure shows the fall in the completions of building of new houses in Scotland between the first and last quarters of 2006 and 2009 respectively, in all sectors of the economy. Figure 3: New House Building Completions in Scotland- Q1 2006 -Q3 2009 (Source: Burgess, 2010, p.9) The next figure reflects the starting of new buildings in Scotland between the first and the last quarter of 2006 and 2009 respectively. Figure 4: New House Building Starts in Scotland- Q1 2006- Q3 2009 (Source: Burgess, 2010, p.9) The economy of the United Kingdom recovered from the effects of the recession by the end of 2009. UK witnessed a growth in its Gross Domestic product (GDP) by 0.2% in 2010. The recovery reflected on the improvement of the housing prices in the economy. The following table has been provided to put light on the housing prices prevailing in UK and Scotland in the year 2010. Figure 5: House Prices in Scotland and UK- 2010 (Source: Source: Burgess, 2010, p.4) Different methods of survey followed in different organisations have led to variation of data to an extent. However, the next table puts light on the average price of houses in Scotland and in UK. Figure 6: Average Price of Houses in UK and Scotland (Source: Burgess, 2010, p.4) The table shows that average price of houses in both Scotland and UK has declined since 2007 but has come to a stable state in 2009. It is apparent from the figure that housing prices have maintained the same level since 2009. The trend in housing activities has been undergoing change since 2010. Surveyors are optimistic about the way the housing market has been behaving. Scotland has been recording a steady increase in the price trends at the same time. “The Nationwide house price index for April 2010 reported that house prices are 10% below the October 2007 peak (Nationwide 2010b)” (Burgess, 2010, p.5). According to the surveys, 10% of the Scottish surveyors who were asked by the “Royal Institution of Chartered Surveyors (RICS)” (Scottish Government Centre for Housing Market Analysis, 2010, p.1) said that price of property had increased; while 40% has said that they had fallen. Allowing the seasonal adjustment, a net balance of -20 was created which was down by a net balance of -11 in October. Year on year house prices increased in the 22 local authorities out of the 32 local authorities in Scotland. The average price of houses increased by 2.1% and reached the level of £158,244. However, this figure masks the differences prevailing across and within areas. “The RICS ratio of sales to stocks on surveyor’s books” anticipates changes occurring in the price of houses. The ratio fell from 22.6% to 21.3% in November from the previous month, resulting from the decrease in sales and the rise in the level of stocks. Surveyors expect that the price of houses will fall in the next three months according to the November survey of the RICS. The residential land prices in Edinburgh was £2,350,000, in Glasgow was £1,100,000, and in Aberdeen was £2,100,000 according to the report provided by the Valuation Office Agency 2010. The increase in value of land slowed down considerably in the third quarter of 2010. Value of Greenfield land rose by 2.4% during the same time, while the value of urban lands increased by 0.2%. According to the Savills report, (Scottish Government Centre for Housing Market Analysis, 2010, p.1) a rift was developing between the small and serviced sites which were high in demand and the large and strategic regeneration sites or the bulk lands which had very little trading activities (Scottish Government Centre for Housing Market Analysis, 2010, p.1). 1.4. Part 3 As is evident from the reports, the housing market in Scotland is recovering at a much slower pace than that in UK. Around 14,200 mortgages had been advanced to the people in Scotland during the ending three months in 2009. According to the CML (Council of Mortgage Lenders), “The figure was 4 per cent more than during the previous quarter” but “less than half the 9 per cent jump in mortgages seen during the same period for the whole of the UK” (Scotsman, 2010). The difference was seen to be more startling when the final quarter of 2009 is compared to the same quarter of 2008. During the time the rise in the number of house loans in Scotland was only 22% while that in UK was as high as 62%. However, the Scottish housing market witnessed signs of improvement in 2009. The number of mortgages that were lent to the people for buying homes almost doubled in the third quarter from the first. The market was much stronger in 2008. The lending of mortgages fell from the previous year by 23% in 2009. In the United Kingdom, the figure remained unchanged during the same time. According to the recent estimates by scholars, the lending activities in Scotland would not increase immediately (Scotsman, 2010). 1.5. Conclusion and recommendations While writing this report it was found that the economic downturn took its toll on the housing market activities of Scotland as well as the United Kingdom. It is seen that growth management planning influences the price of houses significantly. It accounts for the fall in affordability of house prices and rise in their volatility. Growth management followed in Britain made the housing market volatile and increased house prices substantially. In Scotland, house prices vary substantially in different regions of Scotland. The regional disparity in house prices across Scotland can be accounted for the primary reason behind its slow recovery of the housing market activities. On the other hand house prices in UK remains generally higher than that in Scotland. However, prices remain at a uniform level across all regions. There is no doubt about the fact that the housing markets in both Scotland and UK are both in a risky situation. Price of houses in Scotland has been rising across all regions. Analysts have said that this is because of the fiscal stimulus and monetary policies undertaken by the government and the shortage of supply. According to the report presented by the PWC, (2010) there would be 70% chance of the housing market not to reach its peak that was attained in 2007 by 2015. There would be stagnation in the price of houses for the next five years. The report said that there would be 50-50 chances of the price of houses to fall by 2020. Analysts suggested that price of houses in UK has been falling since 2009, but that the prices would remain vulnerable to setbacks. It was possible that house prices could fall significantly because the mortgage rate of interests was rising (Kemp, 2010). Thus it is recommended that the government should keep the mortgage interest rates at a constant rate as this would stabilise the house prices to a certain extent. It is argued that the house price changes do not have much effect on the economic wealth of the nation. But according to the economic analysis, unanticipated fall in the future price of houses would significantly affect the nation. It was likely to dampen the speed of recovery in the consumer spending during the medium term. It is recommended that the building of new houses in Scotland should be the same across all regions. It should be made in accordance to the level of demand; otherwise it would lead to price fluctuations. This would help to capture the volatility of the house prices substantially. The sale of houses in Scotland had fallen dramatically between 2007 and the third quarter of 2008. But house prices do show sighs of stabilising with growth recorded in specific localities. Government should increase their lending activities towards people to increase sale of houses to bring the demand and supply of houses at the same level to avoid price fluctuations. It should take steps to keep the rate of interest at a constant level. This would stabilise the house prices to a certain extent. Inflation rates should also be controlled. High rates of inflation would also bring about greater fluctuations and volatility in the house markets. Unemployment should also be controlled in the public sector to maintain demand for houses at a constant level. References Burgess, L. June 3, 2010. The Scottish Housing Market – Update. [Pdf]. Available at: http://www.scottish.parliament.uk/business/research/briefings-10/SB10-34.pdf. [Accessed on December 20, 2010]. Chow, G. C. & Niu, L. August 2009. Demand and Supply for Residential Housing in Urban China. [Doc]. Available at: http://www.princeton.edu/~gchow/Chow-Niu%20Demand%20and%20Supply%20for%20Residential%20Housing%20in%20Urban%20China%2020Aug2009b.doc. [Accessed on December 20, 2010]. Kemp, K. July 18, 2010. Reconstructing Scotland’s housing market. [Online]. Available at: http://www.heraldscotland.com/business/analysis/reconstructing-scotland-s-housing-market-1.1041940. [Accessed on December 21, 2010]. MRSC. 2009. Comprehensive Planning/Growth Management. [Online]. Available at: http://www.mrsc.org/subjects/planning/compplan.aspx. [Accessed on January 12, 2011]. O’Tool, R. 2007. The best-laid plans: how government planning harms your quality of life, your pocketbook, and your future. Cato Institute. Rodrigue, J. P., Slack, B. & Notteboom, T. 2011. Transport Terminal Governance. [Online]. Available at: http://people.hofstra.edu/geotrans/eng/ch4en/conc4en/ch4c6en.html. [Accessed on January 12, 2011]. Scottish Government Centre for Housing Market Analysis. December 2010. Scottish Housing Market Review House prices. [Pdf]. Available at: http://www.scotland.gov.uk/Resource/Doc/1125/0109843.pdf. [Accessed on December 20, 2010]. Scotsman. February 25, 2010. Scotlands housing market recovery trails UKs. [Online]. Available at: http://www.scotsman.com/scotland/Scotland39s-housing-market-recovery-trails.6102393.jp. [Accessed on December 21, 2010] Read More