An Overview of the UK Housing Market - Essay Example

The neo-liberalised economy accelerated the growth of the global housing markets especially, that of the Western real e market. However the trend of enormous growth in the industry had a critical backfire in the recent months which resulted in a serious mortgage crisis. The International Monetary Fund has described this credit crunch crisis as the largest financial shock since the Great Depression (Sreward H, 2008). The lack of availability of funds has caused serious effects in the housing market in the United Kingdom. The objective of this essay is to analyse the trends in the UK housing market in relation with the developments in the overall economic and financial situation in the country. A trial is being made to relate the trends in the housing markets and the financial crunch to the theories of economics. An overview of UK housing market The credit crunch and the national and international economic developments have had substantial impact on the country’s real estate market. Before analysing the present situation of the market, it would be ideal to have an overview of the historic developments in the housing market of the United Kingdom. After the downfall of the housing industry in early 1990, there had been a steady growth in the UK housing market. From the stage of disaster, the industry had dramatic growth resulting in the average house price to touch £163,000 in the year 2005. The quantum of the growth is reflected by the fact that this price was the double of the average house price in the dawn of the millennium. (Cameron G, 2005,). Interestingly the trend was similar in the international scenario as well. The downfall of the US economy and the recession which began in early 2007, catalysed a chain reaction in the international economy as well. This resulted in serious credit crunch in most of the leading economies. The UK economy was no exception. There were serious negative responses in the economy which led to acute credit crunch. The finance flow was seriously affected. Real estate was one of the first industries to be affected by the credit crunch and the allied economic developments. The post recessive period observed critical economic outcomes in the housing industry of United Kingdom. In comparison with the previous year, the house prices were 7.4 percent lower in October 2008. (DCLG, 2008). The average house price in UK in October 2008 was £203,539. At the same time the house prices paid by the first time buyers were almost ten percent lower than that in the previous year (DCLG, 2008). Meanwhile while comparing the price paid by former owner occupiers in both the years; the average price was 6.6 percent lower (DCLG, 2008). By the end of the quarter of the year 2008, the average house prices fell by more than five percent. This downfall is considered to be massive in comparison with the downward trend in the second quarter which counted up to 1.6 percent (DCLG, 2008). The prices fell 2.2 percent in December 2008. (Alberichi E, 2009).This statistics must be read together with the fact that the intensity of the credit crunch was steadily growing in 2008. Thus it can be clearly assumed that the credit crunch has directly affected the average house price in the United Kingdom. The stock index performance of the real estate companies were no exception. On January 08, 2009 an improvised performance of the UK companies relating to the property industry and the Real Estate Index in general was expected as the Central Bank had declared an interest rate cut of one and a half percent. Despite the expectation of better performance, the Real Estate Index declined by close to four percent. British Land and Land Securities, which are UK’s biggest, listed real estate investment firms, traded 4.7 percent and 3.7 percent lower respectively on that particular day (Reuters, 2009). This is a clear indication towards the expected downward trend of the real estate business in the country for at least few more months. Credit Crunch & the Macro-economy The relation of the credit availability with the macroeconomic trend of the nation is quite vital. As the housing industry has played very important role in the development of UK’s economy this relation becomes much stronger. The connection between various economic indicators and the credit availability is being reviewed below to analyse its relationship with housing prices in the United Kingdom. Credit & Consumer spending capacity Proportional to the growth of economy which had an upward trend since 1996, the consumer spending also had faster growth. Since 1996, the growth of consumer spending trends in UK had been less volatile than the disposable income. (PWC, 2008).This very fact relates the relation of this trend with credit availability. The households had increased their spending capacity by enhancing their access to credit. This process had notable relation with housing equity withdrawal. This scenario had resulted in considerable reduction of the saving rates. On the other side an observable increase in the household debts in comparison with the income was resulted.(PWC, 2008) It was in the extremity of this trend that recession struck the global economy. This resulted in limited credit availability. This literally meant that the buying capacity of the public went low. The booming trends in the housing market was linked directly with the buying capacity and thus indirectly with the credit availability. To explain further, the increased purchase of houses and real estate properties directly showed the buying capacity of the consumers. On the other hand the limitations in the availability of the credit reduced the buying capacity of people. Relating these economic realities, it can be concluded that the credit crunch in the United Kingdom has acutely affected the performance of the real estate industry. Adding to the situation, it can also be assumed that the reduced house prices will bring in more negative macroeconomic impacts. The reduction in the house prices is expected to make ample impact in the consumer spending patterns. This theory is of increasing concern as the credit crunch and the reduced house prices are expected to continue for some more time. There are a number of channels through which the reduction in house prices affect the economy. One among them is the effects of the price reduction on the house hold. It makes a feel to the consumers that they are less wealthy and subsequently they consume less. (Cameron G, 2005). Another most important macroeconomic effect is that when the value of the houses reduces, the collateral value that the household owns to borrow against also reduces. This reduces the chances of credit availability. Thus the consumer cannot find fund to make further spending. This economic situation also proves the inverse relationship between the credit crunch and the downturn in house prices. Researches have proved that this economic relationship between the house prices and consumer spending pattern is higher in UK than any other developed country. It has been observed that in UK, when one percent of downfall occurs in the value of real estate properties, consequently 0.07 percent of fall in consumer spending follows. (Cameron G, 2005). Another interesting macroeconomic effect is that when the house price falls, banks and other financial institutions incur losses leading them to contract or sell out their lending. This would make the credit crunch much more serious as consumers would find it more difficult to find credit. In the recent times this has become serious issue as the banking institutions of UK are heavily entering into mortgage markets that were previously dominated by Building Societies. Supply Demand Theory in relation with Credit Crunch & Low House Prices The supply demand theory is one of the basic concepts in economics. It is the fundamental theory which rules the market performance of any product or service. Demand refers to the quantum of a product or service desired by the consumers. On the other hand supply refers to the quantum of the product or service that the market can offer. (Investopedia, 2008). In this context the demand is the desire of people to purchase houses. The supply is the availability of houses in UK’s real estate market. The correlation between price and the quantum of goods or service supply to the market is known as the supply relationship (Investopedia, 2008). This relationship makes price the reflection of supply and demand. In the market scenario of UK real estate, this relationship is quite evident. The impact on the price of the properties was the combined effect of the demand for the houses and the market supply. The demand is highly dependent on the disposable income of the buyers which is the actual disposable money which the customers can afford to spend and invest in the market after paying taxes. (Barnes, R 2008). This income was generated by the consumers of UK’s housing market mainly through credit sourcing. When the availability of credit was highly restricted in the recession period, the spending capacity of the consumers reduced abruptly. This literally meant that the demand for the houses went low. The law of Demand states that when all the other factors in the market remain constant, the price of the product would be inversely proportional to the demand. On the other hand, the law of supply states that when the price is high the supply would be proportionally high. An interaction of the Supply Demand theory can be very well observed in the case of the housing market of the United Kingdom. The credit crunch has caused the demand for real estate properties to shrink. The reduction in price is here however affected by complex relationships of other factors. This would cause the reduction in supply, which in this context is literally the growth of real estate industry. In general it is considered that the national production is highly affected by the demand for the products and services. So would be the dependence of the growth of the real estate industry on the market demand. The sources of demand can be the direct consumers, the government in terms of its spending capacity and also international trade and economic relations. However demand can cause a market performance impact with reference to the quantum of disposable income of the people. This indicator very much depends on the salary or the income the citizens of the nation receive. However disposable income is directly related with other economic indicators and so is other indicators interlinked with each other. As the credit flow almost stopped as a result of the crisis the quantum of the disposable income available with the people reduced to a considerable extend. It is quite obvious that thus the spending capacity of the people would reduce causing a huge gap in the demand. Supply would directly depend on the market demand and the price. In the case of real estate, supply would refer to the availability of more housing properties for sale in the market. With reference to the lower demand caused by the crisis, the supply in the real estate market, which literally means its growth, would be hindered to a considerable extent. Financial Regulations & Market Implications Resources like treasury regulations and policies would be implemented by the government to tackle the aftermaths of recession. This is for obvious going to affect the United Kingdom’s economic scenario in general and thus the housing industry as well. The crisis will lead to regulations in the leasing industry. This will substantially decrease the money flow in the economy. As a result industries and service sector would tend to implement stronger cost control methodologies even resulting in low production and unemployment. Recommendations for Real Estate Industry’s economic reform Short term measures The solution out of this complex economic scenario is to enhance the finance flow which in other words means to increase the availability of credit. The buying capacity of the people will have to be catalysed so that more business happens. This would be important not only for the development of the housing industry but also for the overall economic development of the nation. Government will have to take deliberate efforts towards resolving the credit crunch so that the demand picks up and correspondingly the price. However the Government of UK has initiated many measures towards the reform of its housing industry. On the 6th of January 9, 2009 a £18 Million deal to support the real estate industry has been announced by the government. This aims at providing affordable housing and to support the industry. This move has been described by governmental sources as a part of the measures that the government is initiating to take care of the current difficulties in the housing market. This project is being implemented through the Governments National Clearing House project with Bovis Homes. This would enable the house builders to create demand for their unsold stock as they would be purchased by the Housing Associations. These houses would be further utilsed to provide affordable housing either for rent or low cost ownership (DCLG, 2008). These kinds of measures along with an integrated effort to enhance the finance flow are the only options to get out of the crisis in the housing sector. One added problem is that with the industry showing weaker signs of growth, the potential buyers are reluctant to invest as they expect the prices to further come down. Moreover they are not ready to make a huge financial commitment as the have other concerns of increased priority including the job security and increasing living cost. The investors also do not find this an ideal phase of investment as they expect the downward trend to extend further more. Extensive campaigns and reform measures to reinstate confidence among the home buyers and investors is the prime requirement for the industry to have an improved performance. However the real estate companies are trying their best to educate and convince the buyers that the rates are going to improve at a sooner date. An ideal example for this is the article posted on Property Wire, one of the premier global property news service which states “Prime residential country property prices in the UK fell by 16% in 2008 but further declines are expected to be limited in 2009 as buyer confidence returns to this sector of the real estate market” (Property Wire, 2009). These kinds of trials would help to improve the customer’s confidence in the market which would proportionally increase the demand. The basic economic theory of Demand and Supply would come into play here helping out the industry to have a better performance. Long term measures In addition to these short term remedial actions, it would be ideal for the Government and the economic think tanks to formulate long term economic strategies to avoid such financial mishaps in future. While looking into the root reason of the credit crunch, it can be found that it is the liberlised approach on the economy and uncontrolled growth of the private sector that has caused the menace. This fact is supported by the observation that the credit sectors of nations which depended more on the public sector were not heavily affected. An empowerment of the public sector entities should happen by the deliberate efforts of the U.K government. The government may take lessons from the sustainability of the national economies which were not affected by the crisis. These economies still have Public financial Institutions on the rule. The neo-liberalistic approaches will have to be rethought. References Alberichi E, 2009, Credit Crunch Hits UK House Market, ABC News, viewed 08 January, 2009, http://www.abc.net.au/news/stories/2009/01/03/2458477.htm Barnes, R 2008, ‘Economic Indicators: Overview’, Investopedia, viewed 08 January, 2009< http://www.investopedia.com/university/releases/> Cameron G, 2005, The UK Housing Market : Economic Review, Department of Economics, University of Oxford, viewed 08 January, 2009, < http://hicks.nuff.ox.ac.uk/users/cameron/papers/ukhousingmarket.pdf> Department for Communities and Local Government, 2008, House Price Index - October 2008, Housing Statistical Release, vol.9, pp.3, viewed 08 January, 2009, < http://www.communities.gov.uk/documents/statistics/pdf/1091877.pdf> Department for Communities and Local Government, 2009, £18 million deal approved to buy further new homes for affordable housing, Department for Communities and Local Government viewed 08 January, 2009, http://www.communities.gov.uk/news/corporate/1113423 Investopedia, 2008, Economics Basics: Demand and Supply, Investopedia, viewed 08 January, 2009, Property Wire, 2009, Falls in price of top country property in UK expected to be limited in 2009, Property Wire, 09 January, 2009, economics3.asp> wire.com/news/europe/price-country-property-uk-limited- 200901062348.html> Sreward H, 2008, “IMF says US crisis is largest financial shock since Great Depression, The Guardian, viewed 16 January, 2009, Read More