There is Danger of a House Price Bubble In London - Coursework Example

There is Danger of a House Price Bubble In London In the current economic times, there is nothing financial that is predictable. Most countries, even those rich in natural resources such as oil, have had to deal with a dip in prices of the commodity that is threatening their economies (Kalotay 2015). On looking at countries such as the UK and the US, one thing that is clear and that does not seem to stop worrying investors is the volatility in the price of houses. From the year 2001, there has been a boom in the property market (Martin 2011).

People have reaped millions of pounds from the surge in demand for houses. In the US, the post 9/11 scenario saw a shift in demand for houses from one corner of the planet to the other. Places that have been affected the most by this flux are Dubai, Islamabad, the US, and the UK (Martin 2011). There are several others that have witnessed the property bubble as seen in the UK, a bubble that is now busting. This paper will explore the real danger a house price bubble can pose to a country and most specifically, London.

Before the paper can go any deeper into the topic, it is crucial that it explains briefly what a price bubble is. A property price bubble is essentially a run-up of prices of housing majorly fueled by demand, speculation, and a belief that the most recent history of an economic situation is a foolproof forecast of the future. A house bubble start with skyrocketing demand (mainly a shift of the demand curve from the left to the right) in the face of a failing supply or a limited supply taking a relatively long period to replenish the gap the demand creates (King 2010).

The market then speculates that they can make short-term purchase and selling of the houses and make quick profits. The belief then fuels more demand for the property in question. After some time, the demand for the houses either stagnates or decreases (the curve shifting to he left) yet the supply had been propped to keep up with the demand. The situation results in a sharp decline in the price of houses and the price bubble, therefore, busts. The price bubble, as seen above is dependent on having buyers who buy property at prices they know so well are fictitious but are willing to buy the commodities at such prices as they believe that, after all, there will still be another ‘fool’ willing to pay as much as they can to have the property and resell it at a profit.

The result is a situation of unreasonable demand and highly priced commodities, prices that cannot sustain themselves. The rise in the cost of houses brought about people looking at houses as investments and not homes. It reduced the number of individuals who wanted to build their houses and instead encouraged them to borrow money from banks so as to buy the houses. Discussing the price bubble is paramount. The fact that people are made to believe that a hike in prices is favorable for business is wrong for the performance of the economy.

Price bubbles affect many individuals who had invested in the property which in turn affects the economy. When prices of commodities go up, many people rush to buy the commodity with belief that the price will continue going up and that they will later be selling at an enormous profit. When this happens, buyers do not pay attention at the price of the commodity and in the case of this paper, housing. Such rates are clearly overstated, but the belief that the demand will persist, and prices only go higher does convince buyers to invest the more.

Sooner than later the reality dawns and the prices nosedive leaving property agents and real estate investors, including individual brokers distraught. The surge in prices is evidently not in line with the increase in income or wages which means that while people are buying the houses at ballooned prices, they do not have any increase in income leaving them with less money to cover for other expenses. Worse still, the people who used loans to buy the property in the hope that they will right after sell it at a profit find difficulty repaying the loan as they cannot even sell the property at the price they bought it at.

Such issues are the same that affect London. Wales recorded a decline of 1-5% in the cost of property. Some areas have recorded a drop of over 10%. In Manchester and York, the prices have dropped significantly (Duca, Muellbauer, & Murphy 2012). Nonetheless, the drop can only be so much, and the prices stabilize clearly at a level that is still unaffordable to the middle-income earners. Those that had bought the houses at very high prices are forced to rent the houses out as they avoid selling the house in losses.

The result is people paying even more for rent. Statistics shows that those in their mid-twenties in the UK will by paying at least £66,800 in rent even before they are thirty (Duca, Muellbauer, & Murphy 2012). The people who benefit from price bubbles are banks. The demand for property, which is coupled with the fact that those who want to invest in properties may not have enough money, is what brings about a need to acquire loans from banks. Typically the banks can address the bubble before it becomes unstable but they do not as they are more interested in the profits the mortgages will bring them (Conlon 2014).

In conclusion, the price bubble is real, and it is affecting scores of Londoners. As discussed above, people are normally likely to be carried away by a rise in prices of property forgetting to evaluate the risks involved if they bought the property and expected the price to rise even more and make profits from the sale. While inflation is rising in almost every part of the planet, the prices of property had been the most exaggerated in recent years. Since the market cannot support his prices at a record high, the likelihood of the property bringing in more losses is evident.

Currently, people are paying more for rent and, unfortunately, are servicing mortgages that did not help bring them the anticipated profits. References Conlon, John R. Should central banks burst bubbles? Some microeconomic issues. The Economic Journal, 2014. Duca, John, John Muellbauer, and Anthony Murphy. Credit standards and the bubble in US house prices: new econometric evidence. Property Markets and Financial Stability, 2012. Kalotay, Kalman. The impact of the new ruble crisis on Russian FDI.

Baltic Rim Economies–Bimonthly Economic Review 1, 2015. King, Peter. Housing Boom and Bust Owner Occupation, Government Regulation and the Credit Crunch. London: Routledge, 2010. Martin, Ron. The local geographies of the financial crisis: from the housing bubble to economic recession and beyond. Journal of Economic Geography, 2011.