Post on 25-Feb-2016
description
The UK Housing MarketA barometer of the economy?
-10
-5
0
5
10
15
20
25
30
35
Per
cent
age
annu
al h
ouse
pric
e in
crea
se (
adju
sted
qua
rter
ly).
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Source: based on Halifax House Price Index (HBOS)
UK house price inflation(annual percentage rates, adjusted quarterly)
Who benefit from rising house prices?
• The losers– The first-time buyer– Those upscaling
• The gainers– Downsizers– Elderly going into homes– Emigrants
• Those largely unaffected– Those not moving– Those moving to another area
where house prices are similar
Who benefit from falling house prices?
• The losers– Those with negative equity wanting to move– Downsizers– People exiting the housing market
• Emigrants• Elderly going into homes
• The gainers
– The first-time buyer– Those upscaling
• Those largely unaffected– Those not moving– Those moving to similar priced houses
Determination of house prices
• Equilibrium in the housing market– Where supply of houses equals demand
• Many different segments of the market
– Price changes caused by shifts in D and/or S• D and/or S P
• D and/or S P
• Problem of inelasticity of supply
Supply curves with different price elasticity of supplyP
Q O
P0
Q0
S1
S2
D0
D1
Q2 Q1
P2
P1
Determination of house prices
• Equilibrium in the housing market– Where supply of houses equals demand
• Many different segments of the market
– Price changes caused by shifts in D and/or S• D and/or S P
• D and/or S P
• Problem of inelasticity of supply– Some lags in price adjustment
• Especially when markets are turning• Currently there is a glut of properties, especially flats,
because sellers are reluctant to reduce prices
Causes of rising house prices
• Shifts in demand: short-term causes– Incomes
• Current and expected– Interest rates
• Current and expected
Halifax variable mortgage rate
Causes of rising house prices
• Shifts in demand: short-term causes– Incomes
• Current and expected– Interest rates
• Current and expected– Availability of mortgages
• Credit rating of applicants• Multiple of income• Required deposit as % of value of property• Problem of the credit crunch
£000s
Ratio of average house prices to average earnings
Source: based on Halifax House Price Index (HBOS)
Causes of rising house prices
• Shifts in demand: short-term causes– Incomes– Interest rates– Availability of mortgages
– Rents (rental property is a substitute good)
– Taxation: stamp duty– Speculation about future
house prices
P1
P
Q O
S1
D1
D2
a
P2 b
Speculation compounding a price rise
People believe that the rise in
price to P2 signifies a trend.
Assume an initial rise in demand
P1
P2
P
Q O
P3
S1
S2
D1
D2
a
b
D3
cThe rise in price
to P2 is compounded by
speculation
Buyers rush to buy now before prices rise any
further.
Sellers hold back, waiting for prices
to rise.
The effect of these shifts is a price rise to P3
Speculation compounding a price rise
P1
P2
P
Q O
S1
D1
D2
a
b
Speculation compounding a price fall
?Complete the diagram by
adding a new demand curve (D3) and a new supply curve (S2) to
illustrate the effect of speculation.
P1
P2
P
Q O
P3
S1
S2
D1
D2
a
b
D3
c
Destabilising speculation: initial price fall
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008*0
2
4
6
8
10
12
14
Mortgage Advances forBuy-to-let Properties
Source: Council of Mortgage Lenders * projected
Advances in period
(£m)% of total
advances
Causes of rising house prices
• Shifts in demand: long-term causes
– Population growth
• Immigration and emigration
– Population distribution
• Family size
• Regional trends
• Income distribution
Causes of rising house prices
• Shifts in supply: short-term causes– Speculation
– Rents (letting property isa substitute)
• Shifts in supply: long-term causes– House building
• Costs• Availability of land• Planning regulations
What will happen to House Prices?
Is there going to be a crash?
What will happen to house prices?
• Short-term: probably fall sharply– Credit crunch– Buy-to-let is now much less profitable
• In many cases rents do not cover the mortgage interest
– Renting is now relatively more affordable– Speculation– Interest rates: actual and expected
• Problem of inflation: B of E reluctant to reduce rate
– Flats fall more than houses
Source: based on Halifax House Price Index (HBOS)
Inflation rates for (a) flats and(b) semi-detached houses
(a)(b)
* projected
What will happen to house prices?
• Short-term: probably fall– Credit crunch– Buy-to-let is now much less profitable– Renting is now relatively more affordable– Speculation– Interest rates: actual and expected– Flats fall more than houses– North fall more than the south
Source: based on Halifax House Price Index (HBOS)
Quarterly inflation rates for (a) the north and(b) the south east
(a)
(b)
What will happen to house prices?
• Short-term: probably fall– Credit crunch– Buy-to-let is now much less profitable– Renting is now relatively more affordable– Speculation– Interest rates: actual and expected– Flats fall more than houses– North fall more than the south
• Long-term: probably rise– Demand will probably outstrip supply
What can the government do?
• Demand– Making house ownership more
affordable• Tax relief• Schemes for mortgage sharing
– But ultimately increases demand
• Supply
What can the government do?
• Demand– Making house ownership more
affordable• Tax relief• Schemes for mortgage sharing
– But ultimately increases demand
• Supply– Relaxing planning regulations– Public housing
Housing as a barometer of the economy• Demand reflects incomes
– Recession causes lack of demand• People cannot afford to move• People less likely to move to other locations
– Exaggerated effect• Interest rates
– Depend on inflation– Reflect credit conditions– Affect the housing market
• Housing market reflects confidence– Demand– House building
• Housing market affects other markets– DIY, furniture, repairs, etc.