Housing Market in the UK - Example

HOUSING MARKETS No) (Lecturer) Introductions The economy of United Kingdom is controlled by the housing market. Housing market determine the demand of property and services, supply of goods and the level of interest in the economy. The housing demand is the readiness and ability of the consumers to pay for the good at a prevailing price. Several factors influence the level of demand in United Kingdom economy. Income of the individuals affects the level of demand; individuals that receive high income have a high purchasing power compared to those with low income. Income is highly responsive to the demand because as income of the households rises the demand also rises up. However, when there is a reduction in the income of the consumers the level of demand in the economy also reduces in the same proportion. The level of interest rate affects the demand of houses in the state since most houses in the economy are purchased using the mortgage loan. When the mortgage interest is high, the demand for the property is low (International Monetary Fund 2004). The rise in the mortgage interest means increase in the loan repayable to the investment banks. At lower, interest the individuals in the economy demand for more property. The statistics show that the current UK rates are low, and more property is sold. The stock situation in UK in terms of housing comprises of private ownership apartments and occupied houses, local authority accommodations for rent and those rented privately, most of this houses are managed by associations for housing. Consumer confidence affects the level of demand in the housing economy. Confidence is brought about by the expectations of consumers about the performance of the economy. Pessimists who have less confidence about the performance of the economy will not invest in the property. While the consumers, who have confidence in the economy will purchase the houses (Great Britain. 2004). Availability of close cheap substitutes also reduces the price of the property in the market. Substitutes are those goods or properties that can serve the same purposes. The alternative of purchasing a house, which is expensive, is renting a cheap apartment. Private property over the recent years has been affected by the available rented apartment for the single men and women who have no need of a big house. Changes in fashion of the consumers in the housing market affect the demand for the good in the economy. Over the past years, the individuals in the economy have found it fashionable to own rather than renting it. The trend has shifted the demand curve to the right due to increase in the number of individuals purchasing the property. Increase in population in the economy increases the demand for the property. Price elasticity of demand is the receptiveness of demand to a slight change in prices of the property. Price elasticity is calculated by dividing change in the quantity demanded by change in price of the property. For example, if the price of property increases from £1 to £1.2, and the daily sales falls from 600000 to 400000, the PED will be: PED= change in quantity/change in price (400000-600000)/ (1200-1000) =-100* 1/600000 =- 0.000167 The negative sign in the price elasticity of demand shows the relationship between demand and its price. Price elasticity of demand can take four forms depending on their values. PED that is less than one is inelastic demand. Inelastic demand for goods means that an increase in price by a greater amount reduces quantity by relatively smaller size. Properties, which are inelastic, are suitable for a country that wants to increase tax because a tax increase means an increase in the price. Increase in the prices will not affect the quantity demanded of the commodity in the housing market. PED of more than one means that the commodity is more sensitive to price and is referred to as elastic good. Increase of a price by small proportion decrease the quantity demanded by large amount. When the commodity is elastic, the investor should not increase the price because the consumers can shift to the readily available substitutes. Perfectly inelastic, a commodity has a PED of zero, which means there is no change with an increase in price of the commodity. Perfectly elastic, commodities has PED of infinity because an increase in price by a smaller amount reduces the quantity demanded over 100%. Unitary means that the rise in price reduces the price by the same proportion of the rise in price. The following diagram explains the elasticity of demand at different points and their relationship to the firms’ revenues. Price elastic of demand has relationships with the revenue function of the firm. The firms use the is projected relationship between PED and revenue to make strategic decisions. The firm maximum total revenue is projected at point where PED IS 1, total revenue is at the maximum point and the marginal revenue is zero (economicsonline.co.uk) . Price elasticity of demand is an important pricing tool since the investors raise or lower price basing on the figures of the PED. The price elasticity of demand in the housing market is influenced by several factors in the economy. Substitutes available will make a commodity price elastic while unique products exhibit inelastic demand. The necessity of the product in the market makes them less responsive to price change. The consumers cannot live without the product hence with an increase in price does not reduce the quantity demanded of the commodity. The advertisement by the firm makes commodities inelastic. Advertisement makes the individuals in the economy more loyal to the product. The loyalty will make them less responsive to the changes in the price of the commodity. Advertisement shifts the demand curve to the right due to increasing demand by the new customers in the market. Income of the consumer in the economy increases the demand for houses in the housing market. Income elasticity of demand is measures that determine the change in quantity due to an increase or a decrease in quantity demanded of houses. The income elasticity of demand is calculated by diving the percentage change in the demand for the change in the individual income. As income rises the demand for residential property. The demand for housing in the UK depends on the permanent income of the consumer. The income elasticity of demand depends on the type of commodity at the market. If the commodity is a normal good, the demand will rise for the good. An inferior commodity reduces with an increase in the income of the consumer in the market. For luxury, commodity increase in income increases the demand for the goods since additional incomes means movement to a higher social ladder. The income elasticity of such good is highly elastic. In United Kingdom the consumers are income inelastic to houses since currently it is fashionable to own an apartment. The sign of the income elasticity of demand shows the type of good in the economy. Income elasticity is calculated for various reasons. The firms can project their next sales basing on the YED, for a normal good an increase in the income means an increase in the demand for the commodity. When the company calculate the YED and find out that it is positive, the company can predict their future sales using the income trends over the past years in the economy. YED also affect the pricing policy of a company. The company base their price on the YED, if it is positive, the company can raise the price of the good following an increase in the income of the consumers. When the commodity is an inferior good, it will be difficult to increase prices because it will not compensate the producer for loss of demand. Investors the YED results to diversify into the housing market economy. The housing corporation will build houses with various YED to stabilize their revenue over the fluctuation in the national income of the individuals in the economy. The income in the economy changes with the business cycles in the economy. High positive value of the elasticity of demand affects the income by a greater amount. Housing supply is the total number of houses in the economy available for sale. The houses include the old and the newly built houses. For the houses to meet the supply conditions, it should fulfil the following criteria: the total cost of production, government tax and subsidies to the producer and the number of firms. The cost comprises the cost to their employees, cost of the building and the local authority cost. The producer to arrive at the cost of the house to the buyer calculates all the cost. The supply of houses in the market is influenced by the following factors: price, technology, government policies, subsidies and the total cost of production. The price is a main determinant of supply in the market. As the price of houses in the market goes up in the market, there will be an increase in the supply of houses. As the price rise, the owners of the houses sell their houses and build more houses to capture the price in the economy (economicsonline.co.uk). The diagram below is an illustration demand for private houses in Uk Availability of factors of production such as labour, land and capital increases the supply of houses in the economy. When there is free land for construction, the supply curves shift outwards while when the land available for construction is limited the supply curve shift the curve inwards. Labour is also vital in the construction of new houses. The construction companies need the workforce to undertake the entire construction work. Availability of capital factor enables the companies to purchase the requisite materials used in the construction of the houses. Availability of all the three resources increases the supply of the houses in the economy. The total cost of construction affects the supply in the market. When the cost of construction is high, the supply of houses is low since the construction companies will not build houses at a higher cost. However, when the cost is low, the supply of houses in the economy increases because the construction materials are cheaply available. In United Kingdom, a government subsidy increases the supply of houses. A subsidy reduces the cost of construction of the houses in the economy (Publishing 2011). The government gives subsidies to the company to increase the housing facilities in the economy. The application of new technology makes the work of constructors easier. The new process of construction advanced by technology has increased the number of houses constructed in the economy. Use of capital-intensive machines makes work easier for the company to build new houses within a short period. Technology increases the supply of houses shifting the curve to upwards. The government regulations affect the supply curve of houses in the economy. When the legislation on building is strict, the supply will decline in the economy. Relaxation of the rules increases the supply of the houses in the economy. In London, the supply of houses is high since the government legislation is minimal. The introduction of Home Information Packs by the government of United Kingdom has increased the supply for houses in the economy. The expectation of change in future prices also affects the level of supply in the economy. If the firms expect a higher price in the future, they will not supply now until the future time. The firms that speculate a lower price will supply more now to avoid the future loss due to low prices. A large number of construction companies available in the economy increase the supply of houses available in the economy. The elastic of supply of houses in UK is inelastic in the short run since the construction companies cannot increase houses for a short period following an increase in prices of the house. The supply is influenced by the demand of the commodity in the market. The demand determines the price of the commodity in the market while the supply responds to the demand of the commodity in the market. Elasticity of supply is affected by various factors in the economy. If the construction company has available capacity to expand with no extra cost, the supply will be more elastic. Time affect the elasticity of supply. In a short period, the supply is inelastic but in the end it becomes elastic. Price elasticity of less than one means the commodity is price elastic this is because a slight change in price affects the quantity supplied into the market. Inelastic supply has PES of more than one since a change in the price affect the quantity of the supply by a small amount. For perfectly elastic commodities, a slight increase affects the supply by more than double. The elasticity of supply assists the house owners to predict the prices in the market and make investment decisions. The price and the quantity in the housing market are determined by the supply and demand of the houses in the market. The supply of houses in United Kingdom is stable, but the demand has risen the overtime leading to a persistent rise in price of the houses in the economy. The rise in the number of population leads to more demand for the houses. In UK, statistics shows that the construction companies are few while the population grow in an arithmetic progression. Most houses in the country are not enough for the ever-growing population of people. The demand increases the price of the houses by shifting the demand curve to right. The supply of ready houses for sale is limited due the government restriction. The low supply will increase the demand for the readily available houses pushing the prices up by a large margin. In the city of London, the individuals have high income compared to individuals in other parts of the United Kingdom. The high income has increased the demand for houses in the market leading to the high price. However, in rural areas the supply exceed the demand because of low income, hence the equilibrium prices cannot be achieved. The land in United Kingdom is relatively expensive; hence, few companies venture into the business of construction. The houses available will be expensive because of the ever-growing demand. The labour union has increased the minimum wage for all the workers in the construction company. All the workers are entitled to risk allowance due to the nature of their job. The increment in the wages has made construction more expensive hence reducing the number of houses in the market. For over the past years houses in UK are expensive due to increasing in the total cost of construction. The speculation of supply and demand by investors in the economy affects the price. The speculation that the new investors in the market will increase the demand will shift prices higher than the equilibrium prices. The economic level of interest increases the prices of houses. Increase in the will purchases it at high prices. High-interest rates reduce the supply of houses in the economy that indirectly affect the demand in the economy. Government regulation should intervene in the economy to stabilize the economy since the two forces is unable to control the price levels. To reduce the level of prices in the economy, the government should set the minimum and maximum price of the houses to avoid exploitation to the agents in the economy. The price should reflect all the cost incurred by the producer and should be affordable to the consumers. The government should invest in social houses using the taxpayer’s money. The houses should be sold to the public at a lower price to reduce the demand thus lowering the price at the market. Equitable development across the country enables the investors to invest in houses in fewer developed parts of a country. Construction of more houses will reduce the price of the houses due to more available houses. Local authority should allocate available land to willing investor at a lower cost. The investors should be willing to construct more houses, and sell them at relatively low prices. The UK government should reduce their legislation on houses for more houses to be constructed to cut down the increase in prices. Housing Corporation should give the government advice on the total number of houses required in a country. The recommendation for good housing facility reduces the price of housing and improves the standards of living of the people in UK. In United Kingdom, the supply and demand but also the level of inflation in the economy do not only cause rise in prices of houses. Inflation is brought about by the increased price of all the commodities in the economy. The economy experiences high demand as compared to supply goods pushing the prices high. In the year 1996, the prices of houses rose from £71,000 to £96,000in the year 2007 due to inflation in country economy. The reduction in the rent payable by the people reduces the demand for houses. Most people prefer to live in a rental apartment than purchasing his or her house due to increase in the price of the house. When an individual buys a house in the market, he reduces the amount of rent per month. The cost of purchasing the house should be reasonable so encourage individuals to buy more houses in the economy. Interest rate plays a role in the increase of prices in the country over the past decade. Most investors in the economy invest in buy to let property and they mostly depend on mortgages to buy the houses. When the interest is high, the price of the property will also be high. Housing market plays an important role in the determination of the prices of houses in the economy. The demand for houses in the market shows the number of people who are willing to buy the houses at the prevailing price. The supply, on the other hand, shows the total number of houses available in the economy. The markets show the combination of the two forces that determine the overall market price. However, in UK the supply for houses has never been equal to the demand for houses due to the cost and price of the houses. The demand always exceeds demand thus forcing the investors to raise the price above the market equilibrium. The elasticity of supply and demand is important in the market for houses. The elasticity of demand assists the investors when they can successfully raise the price without affecting the demand for the houses in the economy. Elasticity of supply assists in the projection of sales in the economy. Income elasticity measures the change in income with the change in demand. Individual with high income will demand more houses as compared to those with low income. In UK, residential houses are cheaper compared to buy to let houses. This is because there is high demand for the property in the market. Work cited Economics Online. (n.d.). Retrieved January 30, 2015, from http://www.economicsonline.co.uk/Competitive_markets/Price_elasticity_of_demand.html Economics Online. (n.d.). Retrieved January 30, 2015, from http://www.economicsonline.co.uk/Competitive_markets/The_housing_market.html Markets in Action - Market for Housing in the UK. (n.d.). Retrieved January 30, 2015, from http://tutor2u.net/economics/revision-notes/as-markets-housing.html International Monetary Fund 2004. United Kingdom: Selected Issues. Washington: International Monetary Fund. Great Britain. 2004. Housing statistics: 2004. London: Stationery Office. Publishing, O. E. C. D. 2011. OECD Economic Surveys. Paris: Organisation for Economic Co-operation and Development. Read More