UK Housing Market

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UK Housing Market

Extremely important for two main reasons:

1. Housing usually represents a household's biggest single purchase, and a house represents the largest single item of consumer wealth

2. Changes in house prices can have considerable effects on the rest of the economy

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Change in House Prices

Affects the value of household wealth, creating either a positive or negative wealth effect

Positive wealth effect = a rise in house prices, the ratio of the market value of the property to the debt on that property, typically in the form of a mortgage, rises creating an increase in equity. This can trigger housing equity withdrawal and can be a significant boost to consumer spending

Negative wealth effect = a fall in house prices, the ratio of the market value of the property to the debt on that property, typically in the form of a mortgage, falls creating a decrease in equity.

Changes in Interest Rate

Key policy tool to regulate the UK economy, often has a more significant effect on consumer spending in the UK than in other economies

Due to the relatively large proportion of home ownership in the UK, and the general spending sensitivity of UK consumers to interest rate changes

Property Prices, Debt and Equity

While the debt on properties falls over time (when repayments are paid), property prices tend to rise.

Meaning that owner's equity in their property also rises (the difference between the market price of a property and the debt owed at a point in time)

Property prices that fall to a level that creates negative equity (higher debt than market price) reduces the value of consumer confidence and is likely to discourage spending

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Demand for Private Housing

Determined by a number of factors including:

House prices

Population

Households incomes

Social trends & fashion

Interest rates

Availability of credit

Prices of substitutes

Buy-to-let demand

Expectations

Unemployment

House Prices (See Below Diagram)

Inverse relationship between house prices and demand

Income and substitution effect

At higher prices, real incomes will fall and individuals will reduce their demand

In addition, at higher prices, the alternatives to owning a property (e.g renting), appear more attractive and individuals are more likely to rent

When house prices are lower the reverse is true, with individuals encouraged to buy because a a rise in their real income and because renting seems less attractive

The demand for property is also partly speculative, so that a rise in prices can lead to a rise in demand as buyers anticipate a speculative gain

Population

Total demand for property is determined by population size and changes in the structure of the population caused by migration and long term changes in birth and death rates

An aging population will increase the overall demand for property

Household Incomes

Changes in both the level of national income, and it's distribution, can have a significant effect on the demand for property

As houses are normal goods with a high income elasticity of demand, increases in income can trigger a larger percentage increase in demand

As incomes rise, many individuals switch from renting to home ownership (or move into a bigger property)

Social Trends & Fashion

Social and lifestyle trends, such as a preference for late marriages, can alter the pattern of demand for houses, and the total demand

The preference for later marriages has led to an increase in the number of single households, and to a rise in the demand for flats and apartments

Owning property has become increasingly fashionable in the UK over the last 25 years for reasons such as TV programs featuring property purchases, renovations and 'make-overs', which have all increased interest in housing and the housing market

Interest Rates

Changes in interest rates may be passed on by lenders (e.g banks or building societies) and this will also increase the amount of monthly repayments for those on variable-rate mortgages

Since 2008, the Bank of England base rate has remained at 0.5%. However, mortgage rates did not fall so dramatically, as lenders looked to maintain their liquidity and increase their profitability

Many borrowers were on fixed-rate mortgages, and could not take advantage of low interest rates in the short term

Availability of Credit

During the banking and financial crisis of 2008-09, the supply of credit fell which reduced the demand for housing, and led to a fall in house prices

Price of Substitutes

Renting property is an alternative to ownership, and changes in rental prices can affect the demand for private property

Buy-To-Let Demand

The increase in availability and popularity of buy-to-let mortgages in the 1990s creates a new market for property as an investment and gave a boost to an already buoyant market

Expectations

Property developers and ordinary householders often base their current demand for property on expectations of future price changes

Rising house prices encourage speculation and falling prices discourage speculative buying

Unemployment

If unemployment is high, incomes are lower and limiting the number of people who are able to afford properties

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Supply of Private Housing

Determined by a number of factors including:

Price

Availability of factors

Costs

Government legislation

Subsidies

Technology

Price (See Below Diagram)

The relationship between supply and price is positive

Rising house prices encourage house builders to construct more housing, and exisiting owners are encouraged to sell

Supply is frequently inelastic because of time lags and legal complexities, and in the case of new builds, difficult due to obtaining planning permission

Availability of Factors

New house building depends upon the availability of land, which may be very limited in the short run

An increase in the availability of land will shift the supply curve to the right

Availability of labour is also important e.g a shortage of bricklayers would reduce the supply of new houses

Costs

In the case of new builds, building costs may also have a significant effect on supply

These costs include raw materials and labour costs

A shortage of labour could push up the wage rate and increase building costs, which would cause the supply curve to shift to the left

Government Legislation

The strict requirement for planning permission for new house building may deter house builders

Conversely, relaxation of regulations, as happened in the London Docklands, is likely to encourage building

Government can also tighten or relax restrictions on building in rural areas, such as the green belt

In 2007, the Government introduced 'Home Information Packs' in an attempt to speed up the house buying process. However, critics argued that they added a new layer of bureaucracy into an already over-regulated market, and the requirement to provide these packs was eventually scrapped in 2010

Subsidies

Subsidies given to house builders are also likely to encourage supply

E.g subsidies given to builders of 'affordable' homes for key workers, including police, fire and ambulance workers

Technology

Application of new building methods e.g pre-fabrication, and the use of new building materials have increased the speed at which new houses are built, and hence increased the supply of property

This has tended to increase the elasticity of supply of properties at the cheaper end of the market

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House Price Equilibrium

In the short run, supply is relatively inelastic (due to taking a long time to build houses). Hence, increases in demand (e.g by a fall in interest rates) have an especially big effect on house prices

House Prices and Interest Rates

A small fall in interest rates can trigger a large increase in the demand for property

Lower interest rates lead to lower mortgage rates, and encourage new entrants as well as people looking to buy second homes as an investment

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Regional House Prices

London - £531,000

South East - £359,000

South West - £263,000

Yorkshire - £186,000

North East - £158,000

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Key Problems Facing Housing Market in the UK as of 2014

According to a survey

House prices too high (47% of respondants)

Size of deposits / costs of mortgages

Lack of social housing

Rents too high

Not enough new homes built

Economics Factors Behind Rising UK House Prices

Low mortgage interest rates

Speculative buying of property

High cost of renting a property

High land prices

Low level of new builds alongside growing population due to increasing net migration

Incentives such as Help to Buy schemes

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Government Intervention to Help the Housing Shortage

A loosening of planning restrictions - relaxation of planning constraints for new housing. There is no shortage of land in the UK, merely a shortage of land on which it is possible to build new homes

Building homes on brown-field sites - financial incentives for construction companies to build on brown-field sites (previously developed land)

Encouraging self-build schemes - they work out cheaper in the long run and they give people the satisfaction of building a home to their own specification and design

Build more social housing - allowing each local authority (council) greater freedom to borrow money to fund the construction and supply of social housing

Increased innovation and productivity in the house-building industry - encouraging more innovation e.g making it possible to build home attractively at higher densities (more properties per square acre of land)

Reducing the number of empty houses - e.g compulsory purchase orders if owners of properties allow their properties to remain empty and unused for 6 months or more - these can then be offered to people on housing waiting lists at sub-market rents

Tax breaks - for investors willing to make rented properties available at more affordable rents

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