Housing can be defined as a consumption good providing a flow of user services over a number of years. Also housing is a fixed asset (a major source of personal wealth). The structure of the housing tenure keeps on varying; for example houses can be
Owner Occupied (largely mortgage financed)
Privately rented (properties available from the commercial rented sector)
Public rented sector ( council housing)
Quasi rented sector (Inc. properties made available by housing associations)
The housing market of U.K. is extremely segmented
There are differences in
Prices of house within local areas
Prices of houses within towns and
Prices of houses across regions of the country
Also it can be said that the average prices of the houses give the information regarding an area or region-i.e. it’s relative economic prosperity.
Housing Market uses the offer system, in that the potential purchasers bid for a property, the price of which can be above or below the asking price. Thus housing auctions are becoming increasingly popular as a means of selling and buying houses.
Quantity demanded (Qd) of a good or a service is the amount that consumers plan and are able to buy in a given period of time at a particular price.
Law of Demand
Keeping all the other factors equal, the higher the price of the product, the lower is the quantity demanded. The other factors are the non price determinants of demand such as income or taste.
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When these other things are kept constant, it can be said that the Quantity Demanded (Qd) and price are inversely proportional to each other. This means that whenever price goes up, the quantity demand goes down, whereas whenever the price goes up, the quantity demand goes up.
Thus, the curve for demand is always downward sloping.
(Source: Economics by Walter J. Wessels 3rd Edition)
(Figure: Typical Demand Curve)
The quantity supplied (Qs) of a product is the amount that the producers plan to sell in a given period of time at a particular price.
Law of Supply
According to the law of supply “the quantity supplied will increase when the price is raised and will decrease when the price is reduced”.
Here the price and the quantity supplied (Qs) are directly proportional to each other. For a normal supply curve, the non price factors that are kept constant are technology, wages of workers, etc. Thus, a supply curve is a downward sloping curve.
(Source: Economics by Walter J. Wessels 3rd Edition)
(Figure: A Typical Supply Curve)
Buyer’s Housing Market
When the demand of housing is weak and when there are lot of properties available on the market, the balance of power switches towards the potential buyers. The buyers should be given a chance to negotiate a price lower than the market price.
In contrast, the sellers may require a quick sale and this provides an extra bargaining power to the buyers.
The balance of power in the housing market shifts towards the seller when there is a shortage for good quality properties and the market demand for the properties are high. The sellers take the advantage at this moment and wait for the prices on their properties to get to a desired maximum price.
GENERAL FACTORS AFFECTING HOUSE PRICES
Changes to life expectancy
Rise in the number of single parent households
Increase in the number of single people living on their own
Changes in social attitudes towards home ownership
Rise in the rates of Divorce and Separation
Mortgage interest rates
Expectation of future house price rises (Speculative demand)
Growth of real disposable incomes
Demographic Factors (i.e. changes in the age structure of the population)
Availability and cost of rented property in the UK
According to Martin Ellis, a housing economist at Halifax Bank, “The last 50 years have witnessed some remarkable developments in the UK housing market. There has been a significant shift towards owner occupation with the majority of households now living in their own homes rather than renting.” Ellis has also predicted that there will further changes in the years to come, market that can never be predicted at the present.
(Source: www.llyodsbanking group.com/media1/50_years.asp)
PAST THREE YEARS DATA OF HOUSING PRICES
According to the data provided by the Halifax Bank, the prices of the houses in UK have raised by 0.6% in January 2010, which is the rise for 7 months in a row when compared to those prices from December 2009. The figures show that there will probably be a continued trend of rise in the prices, however, according to the Halifax Bank’s prediction, the overall house prices may remain flat in 2010.
FACTORS AFFECTING DEMAND OF HOUSE MARKET IN U.K.
Factors of Demand
Rise in the income rate provides people with the ability to spend more on houses. These periods of economic growth lead to a further increase in the demand for houses.
Also during that time demand for houses was supposed to be a luxury good. Thus, the rise in income causes a higher rise in the demand for houses.
(Fig -1. Increase in the demand for houses with the increase in the income of population)
The above graph indicates that the prices of houses (and so demand for houses) rise much faster than the earnings. It can be assumed that there are factors other than just rise in earnings that affect the prices of houses which are briefly discussed in the following paragraphs.
Demand for the prices of houses in UK depends also on the consumer confidence regarding the future economy of the housing market. If people predict a rise in the prices of the houses in near future, then the demand of houses today will also rise so that the people can gain from the housing wealth.
Interest rates play a vital role in calculating the cost of mortgage interest repayments.
In the early 90’s when the interest rate reached 15%, the demand for houses collapsed, however, in 2008-2009, the interest rates were cut down to 0.05 %. It is clear from the above data that low interest does not mean a higher demand which can be attributed to other factors like recession and unemployment which kept the demand in low levels.
A very important factor affecting the demand of houses and thus the prices is the ‘Population’ factor. It is not only about the number of people, but also the demographic changes. There is an increase in demand for houses due to the fact that there is an increase in the number of people who are single and prefer living alone.
Availability of Mortgage Finance
In the early 90’s the availability of finance were restricted via stringent rules. However, with the deregulation of the banking sector, there has been an increased competition between the banking sectors; there has been a rise in the number of mortgage products. Products such as ‘interest only’, self certification mortgages up to 6 times the income has attracted people to take more mortgages, leading to an increase of demand for housing.
But, many mortgage products fell due to the shortage of finance in the money market during the 2008 credit crunch.
Many people use inherited wealth to buy house. This might explain about the rising ratios of house prices with respect to income.
It is also becoming prevalent for parents lending children a deposit to support them in buying their first house.
FACTORS AFFECTING SUPPLY OF HOUSE MARKET IN U.K.
Supply Side Factors
In the short run, the housing supplies are fixed because it actually takes time to build house. Thus it can be but that the demand affects prices more than the supply.
However, when there is inelasticity in the supply of houses, then there will be a great increase in the price due to an increase in the demand.
Long Run Supply
Opportunity cost for builders. For instance, are there any better options of returns from other types of investment?
In the UK, there has been argument regarding the significant shortage of houses, which explains the rise in house prices much faster than inflation and earnings.
REASONS FOR FLUCTUATIONS IN HOUSE PRICES IN UK IN PAST YEARS
Builder confidence Falls Further in July 2007
According to National Association of Home Builders, Housing Market Index (HMI), a surplus of homes in the housing market remained unsold during the period of July 2007. This along with the other prime concerns like mortgage rates, affordability, tightened lending standards and higher interest rates, continued at that point of time to take a significant toll on the builder confidence.
The HMI declined 4 points to 24 in July 2007 which was the lowest level since January 1991.
This was the reason, according to NAHB Economist that “Builders were actively trimming prices and offering incentives to the buyers to work down their inventories; despite this, the affordability problems persist which fail to attract the buyers.”
It was derived from the monthly survey done by NAHB that the Single-Family Home (SF) sales are good, fair or poor in the next 6 months.
The survey also asked the builders to rate the prospective buyer traffic from low to average to poor.
The graph is as below:
According to ‘The Economist’, in Britain, there is an overvaluation of the house prices. Figures from the Nationwide Building Society show that there is a rise in the house prices to earnings ratio by 5.4 % in 2007. Then the market got deteriorated and the ratio of house prices to earnings reached 4.1 % in the 2009 first quarter.
But there is a fall in the mortgage rates. In Britain there is a variable mortgage rate, so that the buyers in Britain are benefited more extensively from the sharp fall in short-term interest rate. According to the Council of Mortgage Lenders (CML), the people in Britain devoting their income proportion to the mortgage-interest payments fell by 4 % over the past 12 months.
(Source: www.economist.com/business-finance/displaystory.cfm; Feb 11-2010)
According to the House price Index by Halifax, prices of houses have increased since past December by1.1%, which was the first rise since March 2008. According to the data from Halifax, house prices have raised by 9.4% since reaching a lowest in April 2009.
The Demand of Houses has stimulated because of the significant fall in the interest rates which is the result of worldwide financial crisis.
Housing Market continues to Rise
According to the latest land registry figures, the sales of houses in England rose by 11% in September 2009 because of the decrease in the mortgage rates.
Mortgage rates are important factors of Demand which actually is “Price of Other products”
This will actually cause a shift in the demand curve to right.
High Demand combined with low supply of houses results in rise in house prices
Signs of improvement in the market conditions encourage more homeowners to put their hoses for sale, but the new supply is still not able to keep up with the rise in the demand.
Thus there is an increase in the ratio of total houses sold to the overall stock of unsold houses in a row for the eleventh month in November 2009. (Source: RICS Monthly survey, November 2009).
As a result, many homeowners remain reluctant to sell the houses at current prices.
This is the factor of demand that if the price of the product is expected to rise in the future, the Demand of the product today increases as well.
Improving labor Market has supported the housing Demand
It was estimated that the employment increased by 6000 during the past October. This was considered a significant improvement in the labor market conditions; which is a key factor in driving the housing market. This is also one of the important factors in underpinning the rise in housing demand in the past recent months.
An independent research recently done by the Halifax Bank, demonstrated that “The proportion of disposable earnings devoted to mortgage payments by a potential new first time house buyer on the national average earnings has almost halved from 50% in June 2007 to 27% in November 2009”
This improvement in the affordability is a result of the both the low house prices and also the interest rate reductions. It is estimated that nearly a quarter of the local authority areas became affordable for a potential first time buyer between 2008 and 2009, which led to a rise in the number of affordable areas from 16% to 39%.
According to Mr. Kathy Hayman, the Director of Garratt Property Group Ltd. “Historically, the UK property prices have doubled every 10 years and the average annual growth in the market is 7%. With the valuations at a low point following the recent market slump, growth over the next five years should be exponential.”
Every two years, house prices start to recover and look set to increase substantially for the subsequent five years.
In the light of crisis in the Global credit, the new builds have been truncated according to a report in the Architects Journal stating that by 2016 there could be a heavy shortfall up to 750,000, thus the demand of houses will increase.
FUTURE HOUSE PRICE PREDICTION IN NEXT TWO YEARS
According to the National Institute of Economic and social Research (Niesr), the house price will keep falling due to the reason that the availability of mortgages has shrunk by 65 percent, which is not expected to rise very soon.
Simon Kirby, an Economist at Niesr said that “there have been talks of stabilization and some recovery in the housing market, but we don’t think this is the case. We only see the growth in the housing market returning in 2012”
According to me the prediction of house prices in the next two years is a complete guess work. There are many factors like employment ratios, growth in the overall economy, affordability, public spending habits, interest rates that might determine exactly the level of house prices in UK in the future years.
But looking to the previous year’s facts and data, and the predictions done by many estate agencies expecting the growth in the economy of Britain, I would predict that there might be an overall rise in the Housing market of UK.