UK Property Price Volatility - Term Paper Example

In the Interim Report no. 91 of the Miles review, The bank borrowers consider the bank mortgage interest rates, mostly short-term interest rates,  when applying for bank loans. This is the reason why short-term interest rates have higher volatility rates than long-term loans.  Starting thirty years ago, the United Kingdom housing market has been very volatile. The factors affecting the volatility of the house prices are the level of bank loans and the related loan interests and the sudden increasing trend of housing transactions.

There is now a move to transit the variable rate mortgage basis in housing loans tot eh fixed rate mortgage basis. The volatility of the housing market can be decreased if longer term, fixed rate mortgages will be implemented to replace the more delicately sensitive current variable charge housing mortgage rates.The short-term or variable mortgage interest rate basis, according to the findings of Meen(2002) has resulted to short-term sensitivity analysis of house prices of six times the elasticity of United Kingdom market as compared to the housing price industry of the United States.

 The structure of the housing finance industry has contributed to the macroeconomic volatility.Based on Chart  6.1, The house prices are affected by the Gross Domestic Product and the Consumption in the United Kingdom. This only proves that when consumption increases and the gross domestic products increase, the house prices will follow behind as the house prices also increase and decrease to keep in step with the two variables mentioned. The three variables (GDP, consumption and house prices) in turn act as a major push on the United Kingdom economy.

The Oxford Economic Forecasting and the National Institute of Economic and Social Research did a study on housing prices. Chart 6.2 shows that as the growth rate increases, house prices also increase to keep in step thereby contributing to the macroeconomic volatility.