Economic Performance of the UK - Case Study Example

Introduction UK housing market has gone through significant changes over the period of time showing both the negative and positive trends over the period of time. The recent economic changes have affected the market badly and not only resulted into the shortage of housing but also created widespread changes in the rent and prices of the housing units. The changes in the tenure mix within UK can be associated with two important historical periods i.e. 1915 and 1979. There have been drastic and important changes in the social housing market during this time period and also increased the housing occupation. The improvement in both the ownership as well as the social housing can be associated with the improved economic performance of UK’s economy which has sustained itself over the period of time. It is also critical to note that the trends showed further changes from 1979 to 2000s when owner occupation has increased a great deal and social housing gradually reduced during the period. Further, since 1995 there has been a consistent increase in the private rental sector also indicating new changes in the market. This paper will discuss as to how and why the share of home owners have actually declined during the past few decades putting pressure on the social as well as private rental sector. Changes in Tenure Shares and changes in the housing market Indicators Tenure is generally associated with the ownerships and the rights associated with the different variations of the housing ownership and occupancy. It is however important to note that there is a widespread difference on the number of tenures existing in UK however the most basic distinction is based upon the ownership as well as the renting of the property. Two other associated concepts are the private rentals and the social housing and both are also linked with the tenures and how the overall dynamics of the housing market changes. When rent is paid by the private individuals to another individual or organization it is termed as the private renting whereas social renting is where the rent is actually paid on behalf of the tenant by a public body i.e. government or government organization.( Maclennan & . Tu, 1996) Table A : Tenures and their share in housing market during 2007 Year Home Ownership Private Rental Social Housing 2007 70% 18% 13% Source: http://england.shelter.org.uk/__data/assets/pdf_file/0005/166532/Factsheet_Housing_tenure.pdf Though there are three common tenure systems in UK i.e. home ownership, private rental as well as the social housing but other tenures also exist. Co-operatives as well as other co-owned tenures also exist in the market and can have significant impact on the overall tenure mix in the country. There is also a relative diversity in the actual tenures itself because there exists categories and sub-categories within the tenures also. For example, those home owners who have their own homes without any mortgage are labeled differently than the owners who are the home-owners but carry mortgage loans against the same. Tenures also exist where the overall value of the property is lower than what the owner actually owes to the mortgage lender. There are also shared equity and shared ownership schemes thus making things more complicated to exactly define what tenure systems exist within the country.( Benito, 2007) Key housing indicator i.e. housing price to income ratio as increased a great deal with the overall purchasing power of families is on the decline. Housing prices have consistently increased over the period of time whereas the rate of growth of household income was relatively slow. It has been observed that housing prices have increased on the average by 2.9% since 1970s whereas earnings have not increased by that amount. It has reached the peak of 6.51 however it is on the decline since the recession in the economy. There is also a general decline in the number of households on the mortgage as the rate fell from 39% to 33% however it has been offset by an increase in the owning home outright from 29% to 31%.2 Since 2001, there has been a renewed focus on an important housing indicator of new housing starts. There has been an increase in the number especially during recent time however, after 2007; the overall number of new housing start is going to reduce in coming years. It is already on the decline since 2007 therefore creating a shortage of home ownership. Homelessness is also one of the key housing market indicators in UK however with the introduction of Homelessness Act since 2002; there has been a decline in the homelessness. It is however considered as debatable that the number of households admitted under homelessness is much lower and more and more households are actually been discarded from the definition of homelessness. There is also an absence of homelessness targets in Northern Ireland however Scotland is progressively following its targets. The recent trends indicate that the homeownerships is on the decline as the rates have fallen from peak of 71% in 2005 to 68% by 2009. There has been a further decline in the homeownership after 2009 when the overall rate fell to 66% i.e. 14.45 million homeowners in the country. On the other hand, there is a gradual increase in the demand and occupation for the private rentals in the country. This drastic decline in the rates of home ownership can be attributed to the systematic increase in the overall size of the private sector market. The current private rental market is almost equal in share as that of the social housing units suggesting an increased pressure on the private housing rentals as well as the social housing market invariable putting pressure on the government to fill up the space with more investment in social housing.( Meen 2005), Major Reasons for fall in the Home-Ownership As discussed above, there has been a consistent variation in the housing trends in the country. There has been a dramatic increase in the housing for private as well as social housing. It is critical to understand that the recent rise in the private housing is mostly due to the economic changes. UK has gone through economic recession in recent times thus increasing the overall level of unemployment. There has been a drastic reduction in the level of employment levels thus reducing the purchasing power of consumers. UK is a service oriented economy with major employment is driven through financial services organizations. major decline in the level of employment has been in banks and other service related organizations. There have been two important events or the turning points in the modern British history which has resulted into the major changes in the tenure shares. As discussed above, one turning point was 1915-1919 and other was 1979. The overall changes in the tenure share in UK has many drivers and most of these drivers are effectively interconnected with each other thus presenting unique challenge to actually understand them in greater perspective.( Mullins & Murie, 2006) Source: http://monevator.com/house-price-to-earnings-ratio-2012/ There are three important reasons for the changes in the share of tenures in UK over the period of time i.e. economic, social as well as political. All three reasons have resulted into a diversified shift into the housing sector of the economy over the period of time. In the early part of 20th century, there was a renewed political support from the government and for the first time, government started to take notice of the changes in the housing market. In the first few decades of 20th century, much of the housing market was crowded and without the intervention from the government. It was also due to this reason that urban areas in the country started to get crowded. The first real support from the government to effectively plan for the housing and increase the social housing started after First World War. Second key turning point came in 1979 when there was an increasing dissatisfaction over the social housing. There was a consistent decline in the quality of the social housing and the collapse of few buildings actually highlighted as to how the social housing may not be reliable and quality alternative to the private housing. It was also this reason which forced Conservative Party to actually focus more on developing the market based housing policies in order to encourage the private ownership of the property. It was also after this era that serious privatization efforts were undertaken in order to privatize the social housing as well as de-regulate the private rented sector. De-regulation of the private rented sector has been further corroborated by the introduction of innovative financial products which has created new and more liquid markets for the ownership of the new mortgages based on both the private as well as commercial mortgage basis. Under commercial mortgages private parties were allowed mortgage loans for properties to be finally rented out.( .( Mullins & Murie, 2006) During 1980s, government also introduced the scheme of Right to Buy under which families were offered the chance of buying the social housing units in which they were living. This further increased the household share in the housing market which was further supported through the Housing Act of 1988 and further development of assured shorthold tenancies also played an important role in the overall growth of the market for private rentals and the ownership.( Robinson, 2007), It is also important to note that the housing market in UK experienced pricing bubble before the current economic crisis. Though the overall mortgage lending scenario was favorable for most part of the period however an increase in the property prices also resulted into swings in the patterns of housing ownerships. Property prices in areas like London skyrocketed thus making it extremely difficult for the first time home owners to buy the new property. (Mullins & Murie, (2006) Source: http://monevator.com/historical-uk-house-prices/ Income constraints have been one of the main reasons for this decline in the housing ownership. It has been observed that the income constraints have increased during last one decade. These constraints are limited to the two important issues of income as well as the wealth. The income component is related with the overall mortgage cost as a percentage of total household income whereas the wealth component is based upon the deposits and down payments required for the first time mortgage owners to be paid to the financial institutions offering mortgage payments. It has been noticed that the monthly mortgage payments as percentage of total income of households has increased during recent times. Mortgage payments have risen to 21% by 2008 as part of the total income. This increase in the mortgage payments therefore itself has served as one of the key de-motivating factors for the new homeowners. This factor therefore has also resulted into an increase in the reliance on private rentals as private rentals are relatively less than the mortgage payments and are more attractive for small families and single individuals. There has been a surge in the student population in UK also and due to affordable rent levels, there has been a consistent demand for the housing units for private rentals. UK universities have been generous in hiring international students therefore a consistent increase in the student population has also contributed towards reduction in the home ownerships.( Andrew, 2010) The volatile prices of the housing and rapid and large swings in the prices have made it relatively difficult for the first time homeowners to pay the down payment for the home ownership. There is clear evidence that the housing prices have actually risen more than the inflation therefore creating more pressures for the potential home owners to save the required money for down payment. Down payment as percentage of the total income of the households increased to a great deal during the recent times making it extremely difficult for the home owners to save required amount of money to pay for the down payment.( Muellbauer, & Murphy, 1997) Key factors affecting home ownership in future according to Population As discussed above that housing market is affected by the economic, social as well as political factors. In future, it is likely that future home ownership will also be affected by these factors. The typical factors affecting the home ownership in future may include: Young Population Young people have relatively low level of income therefore they automatically may not be entitled to higher level of mortgage debt. Higher level of interest would decrease their disposable income to enjoy other luxuries of life and as such may further reduce their ability to accumulate wealth for the purpose of down-payment. Bank of England has been keeping interest rates at historically low levels with bank rate almost touching zero. The low discount rate however is resulting into higher level of inflation which is above 2%. 2% inflation target is the regulatory level and Bank of England has the obligation to keep the rates below that level. However, during recent times, economy has been facing higher level of inflation and in order to reduce that level, Central Bank may increase the rate of interest. There is an inverse relationship between interest rates and level of inflation i.e. a low level of interest rates more likely result into higher level of inflation because of the availability of easy money. A lower interest rate level increases the purchasing power of the households temporarily. Recent economic indicators suggest that the job market for young people is not relatively encouraging. More and more firms are looking for more experienced and productive employees and are not willing to hire young people. This therefore is resulting into the higher level of unemployment for young people causing the diminishing of their ability to buy new homes in future. The recent changes in the job market and higher level of unemployment have actually created more uncertainty in the market. The situation is relatively difficult for first time home owners who do not have any external support to pay for their mortgages.( Rutter, & Latorre 2009), Old People Most of the older population of country is on welfare and is also social housing along with other benefits. The recent fiscal policies of the government would actually hurt the ability of older people to have their own homes in future. It has been suggested that by providing tax benefits to elderly to move into smaller houses can actually result into better management of housing crisis in future. Government should come up with plans to actually provide more suitable housing in order to reduce the housing hoarding in future. UK government is facing difficult times as its overall budget deficit is on the rise. In order to manage the budget deficit, government has announced many fiscal measures including reduction in the welfare benefits for the citizens. A systematic reduction in the welfare benefits of the households would result into reduction in the level of income which will invariably reduce the purchasing power of the households to buy new homes. Transfer payments from government to the households have been cut and as such many people have been put off the welfare too. This step may result into increased reliance on the private rental properties as more and more people will find it difficult to own their new homes. There has been a consistent decline of the sale of the social housing to the households suggesting that the people may not be willing to convert their social housing into home ownerships. It has been suggested that this decline has been due to lack of political support from the government which has actually failed to continue the practice which could have otherwise resulted into a sustained increase in the home ownership in future also. This factor can also have a significant impact on the home ownership in future. (Meen 2008). Immigrants & Asylum Seekers Since 1990s, there has been a consistent increase in the immigrant population in UK causing widespread changes in the social and economic landscape of the country. The increase in immigrants and asylum seekers has not only resulted into a shift in the social housing but in private rental sector also. The changes in the mortgage market and the tightening of credit system however, may result into few immigrants being granted mortgage loans to buy their new homes. The source of recent economic crisis is based upon the over-priced mortgage market and its lending practices. Banks and financial institutions have been criticized for their lending practices and allowing credit to those borrowers who cannot otherwise become eligible for borrowing. The sub-prime mortgage issue therefore has remained one of the key instruments behind the recent changes in the market. There have been various reports suggesting that international migration would ultimately result into serious shortage of housing supply in future. The existing unmet demand for the housing has been emerging from immigrants and these trends may continue to grow in future also despite the fact that credit market may be tough on immigrants. It has been observed that due to recent economic recession, the overall depth and breadth of the mortgage market has shrunk. There has been a reduction in the overall product availability as well as the number and size of the products offered. Lenders have become more conservative in their lending approaches and as such the criteria for lending to first time borrowers have been further strengthened making it difficult for first time owners to get mortgage easily. These changes in the market dynamics therefore can further reduce the chances for people to actually own their own homes and rely more on private rentals.(Nygaard 2011) Conclusion UK housing market has changed over the period of time and has shown cyclical patterns where the overall tenure share has fluctuated. Right form 1915, there has been a consistent increase in the home ownership however; recent trends indicate that there is a gradual reduction of the same. Home ownership is gradually declining therefore there is a consistent burden on the social as well as private rental market to cater to the needs of home owners. There are many factors which led to the decline in the home ownership including the increase in the mortgage payments as part of the total income. There has been a consistent increase in the mortgage payments made by the households as part of their income. Further, increased housing prices have actually discouraged households from buying new homes because of the lack of affordability of the down payments. References, 1. Andrew, M. (2010) ‘The changing route to owner occupation: the impact of student debt’, Housing Studies, vol. 25, no. 1, 39-62. 2. Benito, A. (2007) ‘Housing equity as a buffer: evidence from UK households’, Bank of England Working Paper Series, January 2007, WP 324 3. D. Maclennan & Y. Tu (1996) ‘Economic Perspective on the structure of Local Housing Systems’, Housing Studies, vol. 11, no. 3. 4. G. Meen (2008), ‘Planning for Housing in the Post-Barker Era: Affordability, Household Formation and Tenure Choice’, Oxford Review of Economic Policy, 24(1): 79-98. 5. G. Meen (2006) ‘Ten New Propositions in UK Housing Macro Economics’, Urban Studies, vol. 45, no. 13. 6. Muellbauer, J. and Murphy, A. (1997), ‘Booms and Busts in the UK Housing Market’, Economic Journal, Vol. 107, No. 445. 7. Mullins, D. and Murie, A. (2006) Housing Policy in the UK, Palgrave Macmillan, Basingstoke, p 2. 8. C. Nygaard (2011) ‘International migration, housing demand and access to home ownership’, Urban Studies, vol. 48, no. 11. 9. Pattison, B. and Diacon, D. (2010) Tenure Trends in the UK Housing System :Will the private rented sector continue to grow?. [report] London: Building and Social Housing Foundation. 10. Robinson, D. (2007), ‘European Union Accession State Migrants in Social Housing in England’, People, Places and Policy Online, 1/3: 98-111. 11. Rutter, J. and M. Latorre (2009), Social Housing Allocation and Immigrant Communities, Equality and Human Rights Commission Research Report 4. Read More