It is rightly said that there are three most volatile businesses in the world namely gold, real estate and share market. Past records showed that there are frequently changes in the house prices along with the change in the economic situation of any economy. So real estate affects the different other components of any economy. In comparison to other two sectors, it is relatively stable. However along with the economic situation of economy, there are high fluctuations in the prices of real estate. Real estate economics is one of the branches of economic techniques to real estate markets. It helps to describe, explain and predict the pattern of prices, supply and demand. In the narrow scope it is closely related to housing economics.
The ups and downs of the housing market in UK
In any market economy where most of the economic decisions are determined by market forces (their demand and supply) themselves, the role of government is very nominal. Hence, business cycle is the natural phenomenon. There is sometime boom and sometime recession or depression in the economy. As a result, all the economic sectors get affected. Housing market in the UK is also volatile in course of time period. If we see the data available related to housing market, before 1990s, it was in boom sometimes house price inflation was very high, and more than 30 percent particularly in 1989. During first half of 1990s, the situation was just opposite. From 1990 to 1995, house prices fell by 12.2 percent but in 1996, however, houses prices began to recover and by 2003 house price inflation has returned to rates similar to those in 1980s.
The average (mix-adjusted) house price in the first quarter of 1989 was £81,722, but at the peak of the market in the third quarter of 2007 the average price was £219,256- over two and a half times higher or a total increase of 168%. However, around September 2007, house prices began to fall consistently contributing to the negative UK economic growth of the 3rd Quarter of 2008.
With the beginning of credit crunch in late 2007, prices of housing market began to fall down. High inter banking rate, less availability of mortgages, high interest rate etc. assisted the downfall of housing. In the 1st Quarter of 2008, house prices however were positive but after 2nd Quarter, it began to decrease sharply. In the last Quarter of 2008, it was more than 15 percent (Halifax House Price Index 2009). After the credit crunch of the UK in 2007, it was predicted that house price would crash in the future and it began in late 2008. The shortage of financial support to homebuyers by the self-regulation of the banks following the collapse of the financial system in 2007, diminished demand for housing in the UK with sales volumes around half of the pre-crash level. With reluctant of many sellers to drop their price, there was a chronic over-supply of housing on the market at prices in excess of demand in 2008 and 2009.
Recently published data shows that there is 1.1percent change (annually) and 1 percent change (monthly in December), 2009. The data published by Halifax House Price Index on 7th January, 2010, the average price is £169,042. Commenting on this, Martin Ellis, housing economist, said: "House prices increased for the sixth consecutive month in December. The 1.0% rise between November and December was slightly below the average increase over the previous five months. Prices increased for the second successive quarter following falls in both the first two quarters of 2009. Prices in December were 1.1% higher on an annual basis, marking the first rise since March 2008. House prices have risen by 9.4% since reaching a low in April 2009. The significant cut in interest rates following the worldwide financial upheaval in the autumn of 2008 has markedly reduced the burden of servicing a mortgage for many households. This has helped to stimulate housing demand, albeit from a low base. The recent improvement in the labour market, highlighted by increasing numbers of people in employment in both September and October, has also supported housing demand. The prospects for the market this year will depend on how the UK economy evolves and whether there is a significant increase in the supply of properties for sale. Overall, our current view is that house prices will be flat during 2010."
Key facts published in Halifax Housing Price Index, 2010 are as:
- House prices increased by 1.0% in December.
- Prices in the final three months of 2009 were 3.5% higher than in the third quarter.
- Prices have increased by 9.4% since reaching a low in April 2009; an increase in the average price of £14,552 over this period.
- House prices in December were 1.1% higher on an annual basis.
- Housing market activity continues to pick up.
- Higher demand combined with low supply continues to push up house prices.
- Improving labour market has supported housing demand.
Low mortgage rates have reduced the burden of servicing mortgage debt.
Separate research recently released by Halifax showed that the proportion of disposable earnings devoted to mortgage payments by a potential new first-time buyer on national average earnings has almost halved from a peak of 50% in June 2007 to 27% in November 2009.
Again data published by Halifax House Price Index on 4th February2010, in January, there is 0.6 percent monthly change in UK house prices and average price is £169,777.
The determinants of house prices:
There are various determinants which affect house prices. Demand and supply mainly are two factors which determine house prices. If demand increases or supply decreases, the equilibrium price of houses will rise. Correspondingly, if demand decreases or supply increases, the equilibrium price will fall. So, if we analyse the UK house prices from this angle during time period, the answer lies primarily in changes in the demand for housing because the nature of supply of housing market is inelastic. With the rising level of incomes of people and easy access of mortgages, demand for houses may increase rapidly but the supply will not increase as per as demand.
Following are the various factors that affected the demand for houses.
Incomes (actual and anticipated): Before 1990s and from 1997 to 2007, the income level of people was increasing. The economy was in boom. People had more money. So, they wanted to invest their money in housing. On the other hand, they were confident that their mortgage payments would become more and more affordable over time. So, in the situation of boom of the economy, high income level of people and low rate of mortgage helped to increase in the demand of houses. As a result, demand curve of housing market shifted to right which increased prices of house. In the early 1990s and 2008/9, on the other hand, were periods of recession, when rising level of unemployment and failing or much more slowly growing incomes. People had much less confidence about their ability to afford large mortgages (Sloman J and Wride A., 2009). At that situation, people had low income, less confidence and mortgage rates were high which lowered demand for houses and demand curve shifted to left. As a result, prices of house also decreased.
The desire for home ownership: When Mrs Thatcher, the then prime minister had given more emphasis to own one's own home then people's desire has been increasing to have own home. It is a psychological phenomenon that there is demonstration effect in the society and people start to mimic of others. As a result, people started to have their own houses so far as possible.
The cost of mortgages: From 1996 to 2003 mortgage interest rates were generally reduced which stoke up the demand for houses. During 2004-2007 even when interest rates were slightly high, they did not affect the market. Economy was in good position. People were expecting of higher prices of house. Low mortgage rates and its easy availability increased the demand for houses at that period which shifted demand curve to right. Finally house prices have risen. In 2008, the mortgage interest rates were becoming increasingly high so many people could not afford and this was one factor assisting to initial downturn in house prices.
The availability of mortgages: From 1997 to 2007, country was in economic prosperity which helped easy access of mortgages. At that time, banks and building societies were prepared to accept smaller deposits on houses. But after 2008, due to the global economic crisis and credit crunch in the economy, banks and building societies were aware about granting mortgages. Rising unemployment, falling house prices, growing problem of equity, house owners were unable to pay back their loans. In 2008/9, problem of credit crunch was very high which resulted that banks had less money to lend. Hence, less availability of mortgages helped to decrease on the demand for houses and prices of house fell down.
Future price expectation(Speculation): During boom periods of 1997 to 2007, people's confidence was too high thinking that house prices in the future would become higher. Easy access of mortgages also fueled on that. In that situation, demand curve was rightward shift and supply curve was leftward shift. But from 2008, the opposite occurred. People lost confidence due to recession and they thought that prices in the near future would be lower. So, they were in the situation of wait and see. At the end of December 2008, annual change in average housing price was -16.2 percent. During January to November 2009, it was negative. In comparison to December 2008, the negative rate in December 2009 has significantly decreased (-1.6%). Basically, it is a common trend that in the recession phase of business cycle the production decreases, prices become lower, unemployment rises and people's income becomes lower. So, all these hit the economy in a negative way. And in the prosperity or boom time, people gain much more confidence and the above case will be reverse
What of the future?
Recent data shows that the UK economy has come out from recession achieving positive growth during 2009 however the growth rate is not so hopeful. Other economies in the world (especially US) also declared the end of recession. In this context, economists predict that the economy will slowly start to rise in 2010. And in 2011 and 2012; growth rate will be 2.5 and 3 percent respectively. Now, after the record breaking sales of December 2009 and the good news of positive growth rate (anyway) of economy, people are gaining confidence and hoping for the bright future. At the last of Dec.2009 and Jan.2010, the monthly increase in the average house prices is 1 and 0.6% respectively. It is obvious that recession, depression, recovery and boom are the different phases of trade cycle in any free market economy. So, if once the recovery starts, then it will fuel the prices of house in the next years.
Like other market, housing market is also determined by demand and supply. Looking through the change in the price of houses during 2003-09, mainly demand side is influencing prices of house. The house prices of UK market seem to be unstable in course of time. If we see the data of housing market in between 2003 to 2009, there is fluctuation in the house prices. In between, 2003 to 2007, average house prices was always positive. Exactly, in the third quarter of 2007, average house price was £219,256- over two and half times higher or 168 percent high of base price of 1983. But, immediately after the September of 2007, house prices began to fall. After the second quarter of 2008, it began to decrease sharply. In the last quarter of 2008, it was more than 15 percent and before December of 2009, there was fall in the average prices. But December 2009 and January 2010, has shown the positive increase in the average house prices. Along with economic situation of economy, UK housing market is also getting affected. At the time of economic prosperity, demand for houses increases and in recession, reverse is the case. Different determinants of demand affected the house prices. Income level of people, desire to own house, future price expectations, mortgages are mainly responsible to fluctuate the house prices in UK.
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