Current Issues in the UK Housing Industry - Example

Name: University: Course Title: Instructor: Date of Submission: Current Issues in the UK Housing Industry Introduction An important trend in the housing market in the UK since banking crisis in 2007 is that housing prices have been slowly falling (Home.co.uk, 2011). Gillespie (2001, p.19) postulates that the housing market is significant due to the fact that a vibrant housing industry/market encourages spending and gives individuals and groups interested in buying and selling houses confidence. This sis because house owners are more likely to spend when there is increase in the values of their houses. Additionally, potential house buyers are influenced by consumer durables relating to houses such as wardrobes, washing machines, as well as carpets among others. A single market for the housing industry does not exist, however it is dependent on the region considered as a market since marketing conditions considerably vary from one region to the other. This paper seeks to analyze the current trend in demand and supply of housing in the UK. UK Housing Markets and House Prices The UK’s housing market is significantly important for two crucial reasons. First, housing is the households’ single largest purchase and thus represents single largest consumer wealth item. Second, fluctuations or rather changes in the prices of houses have considerable implications on the rest of the UK economy as a whole (Riley, 2005, p.33). According to the Economics Online (2012), the UK’s housing stock is comprised of privately owned houses/apartments; privately rented houses/apartments; local authority rented houses; as well as houses/apartments managed by housing associations. Owner occupied houses in the UK had risen to approximately 70% of the total households in the early twenty first century as compared only 10% in the early twentieth century. By 2010, the UK had a total of approximately 21 million households. Figure 1 below represents UK households by 2010. Source: Economics Online, 2012 According to Gillespie (2001, p.19), the prices of houses in the market will rise with an increase in the demand while the prices of the houses in the market will fall with a decrease in the demand for houses. In the UK, the conditions of demand and supply vary considerably from one region to the other thus resulting into key differences in the prices of houses. The prices of the houses are also influenced by changes in time conditions. For example, a boom in the demand for houses can potentially result into rising prices for the houses and vice versa hence fluctuations in the prices of houses. Houses are key items and main assets through which most people incur expenses. As such, any changes in the housing market have significant implications to them with reference to their wealth as well as income. According to Economics Online (2012), house prices are significant determinants of demand and supply of housing. Various factors have been pushing the prices of house down since banking crisis in 2007. These include: the UK mortgage and remortgage market has considerably remained in turmoil since the devastating 2007 banking crisis in the UK; there has been considerable fall in buyers demand for housing; prevalent distressed sales in the higher end market in the UK; as well as diminishing consumer confidence and financial squeeze resulting from 2011 spending cuts public sector job cuts and prolonged economic slump. Other factors are: increasing risks in the housing market; lost confidence and low savings by first time house buyers; newly build houses on the market are yet to be occupied fully; and the fact that as housing prices fall the equity generated against a mortgage also reduces making it harder for the debtors to remortgage (Home.co.uk, 2011). Demand and Supply of Housing The demand for housing is influenced by various factors key among them house prices. The relationship between the demand and house prices is an inverse one and the demand curve is downward slopping. This can be explained with regard to the effect of income as well as substitution. When the prices of houses are higher, real incomes of consumers fall hence, consumers minimize their demand for housing. Additionally, when the prices of houses are higher alternatives to buying or owning a house such as renting becomes viable, attractive and appealing and thus consumers are likely to rent houses rather than buy houses. Other the hand, when the prices of houses are lower the real income of consumers rise hence, consumers maximize or rather increase their demand for houses. As a result, consumers are encouraged to buy or own as alternative to buying or owning a house such as renting then becomes less attractive. However, consumers demand for housing is also speculative in nature to some extent. As a result, when the prices of houses are higher there might be a rise in housing demand due to an anticipated speculative gain (Economics Online, 2012). Figure 2 below represents the relationship between average house prices and demand. Source: Economics Online, 2012 Other factors which determine the demand for houses in the UK market by causing a shift in the curve include: population size, structure and changes; household income levels; lifestyle and social trends; interest rates; credit availability; fashion; house ownership substitutes prices; by-to-let demand, and expectations/speculation (Catalogue.pearsoned.co.uk, n.d, p.43). Changes in these factors shifts the demand curve to either right or left as indicated in figure 3 below. Source: Economics Online, 2012 Just like demand, the supply of housing in the UK market is to some extent dependent on house prices, as well as various underlying factors. The relationship between house price and housing supply is positive in nature. When the prices of houses are higher, supply is encouraged as builders construct more houses and existing house owners sell their houses. However, it is essential to note that supply is mostly inelastic as a result of time lags, legal complexities and difficulty in acquiring planning permissions for new housing (Economics Online, 2012). The supply curve upward slopping as indicated in figure 4 below. Source: Economics Online, 2012 Other underlying factors which determine housing supply include: availability of housing factors like land; costs of building materials and labour; government legislations; subsidies; and technological advancements (Industrial Systems Research, 2008, p.38). Changes in these factors will cause a shift in the supply curve as indicated in figure 5 below. Source: Economics Online, 2012 House price reflects both the demand and the supply of housing. Equilibrium price is achieved when demand matches supply. However, supply usually inelastic due to the fact that the construction of new houses takes long hence, the rise in demand have significant implications in house prices (Economics Online, 2012). Figure 6 below represents equilibrium house price. Source: Economics Online, 2012 Conclusion Based on the forgoing discussion, this paper postulates that the demand for houses in the UK has continuously risen while the supply remains relatively stable. As such, the UK housing industry has demonstrated minimal activity among European countries in the recent past. This has led to the rising level of the average prices of houses. The housing market in the UK is free in nature. As such, the prices of houses in the market are dependent on supply and demand. This means that the prices of houses in the market will rise with an increase in the demand while the prices of the houses in the market will fall with a decrease in the demand for houses. References Ball, M., Lizieri, C. & MacGregor, B.D. 2004. The Economics of Commercial property Markets. Abingdon, Oxon: Routledge. Catalogue.pearsoned.co.uk. N.d. Microeconomics. [Cited on 12th October, 2012]. Available from: http://catalogue.pearsoned.co.uk/assets/hip/gb/hip_gb_pearsonhighered/samplechapter/Essch2.pdf Economics Online. 2010. The Housing Market. [Cited on 12th October, 2012]. Available from: http://www.economicsonline.co.uk/Competitive_markets/The_housing_market.html Gillespie, A. 2001. Advanced Economics through Diagrams. Oxford: Oxford University Press. Home.co.uk. 2011. UK Property in 2011: Flat at best or a Year of Falling Home Prices? [Cited on 12th October, 2012]. Available from: http://www.home.co.uk/company/press/uk_property_outlook_jan2011.pdf Industrial Systems Research. 2008. The Mortgage Loans Industry and Market: A Survey. Manchester: Industrial System Research Publishing. Riley, G. 2005. Housing Market Economics: Revision Guide 2005. West Yorkshire: Tutor2u Limited. Read More