The UK Housing Market A barometer of the economy? The UK Housing Market A barometer of the economy?

The UK Housing MarketA barometer of the economy?

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)

UK house price inflation(annual percentage rates, adjusted quarterly)

Who benefit from rising house prices?Who benefit from rising house prices?

• The losers• The losers– The first-time buyer– Those upscaling

• The gainers

– The first-time buyer– Those upscaling

• The gainers– Downsizers– Elderly going into homes– Emigrants

• Those largely unaffected

– Downsizers– Elderly going into homes– Emigrants

• Those largely unaffected– Those not moving– Those moving to another area

where house prices are similar

– Those not moving– Those moving to another area

where house prices are similar

Who benefit from falling house prices?Who benefit from falling house prices?

• The losers• The losers– Those with negative equity wanting to move– Downsizers– People exiting the housing market

• Emigrants• Elderly going into homes

• The gainers

– Those with negative equity wanting to move– Downsizers– People exiting the housing market

• Emigrants• Elderly going into homes

• The gainers


• Those largely unaffected


• Those largely unaffected– Those not moving– Those moving to similar priced houses

– Those not moving– Those moving to similar priced houses

Determination of house pricesDetermination 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

• Equilibrium in the housing market

– Where supply of houses equals demand


– Price changes caused by shifts in D and/or S

• D and/or S P

• D and/or S P


Supply curves with different price elasticity of supplySupply curves with different price elasticity of supply

P

Q O

P0

Q0

S1

S2

D0

D1

Q2 Q1

P2

P1

Determination of house pricesDetermination of house prices

• Equilibrium in the housing market– Where supply of houses equals demand


– Price changes caused by shifts in D and/or S• D and/or S P

• D and/or S P


• Equilibrium in the housing market– Where supply of houses equals demand


– Price changes caused by shifts in D and/or S• D and/or S P

• D and/or S P


– 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

– 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 pricesCauses of rising house prices

• Shifts in demand: short-term causes– Incomes

• Current and expected

– Interest rates• Current and expected




Halifax variable mortgage rateHalifax variable mortgage rate





– Availability of mortgages• Credit rating of applicants

• Multiple of income

• Required deposit as % of value of property

• Problem of the credit crunch




– 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 earningsRatio of average house prices to average earnings



• Shifts in demand: short-term causes

– Incomes

– Interest rates

– Availability of mortgages

• 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

– 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 riseSpeculation 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 riseSpeculation compounding a price rise

P1

P2

P

Q O

S1

D1

D2

a

b

Speculation compounding a price fallSpeculation 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 fallDestabilising 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

Mortgage Advances forBuy-to-let Properties

Source: Council of Mortgage Lenders * projected

Advances in period

(£m)

% of total advances


• Shifts in demand: long-term causes

– Population growth

• Immigration and emigration

– Population distribution

• Family size

• Regional trends

• Income distribution

• Shifts in demand: long-term causes

– Population growth

• Immigration and emigration

– Population distribution

• Family size

• Regional trends

• Income distribution


• Shifts in supply: short-term causes

– Speculation

– Rents (letting property isa substitute)

• Shifts in supply: long-term causes

• 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

– 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?

Is there going to be a crash?

Link

http://news.bbc.co.uk/2/hi/business/7445368.stm

What will happen to house prices?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

• Short-term: probably fall sharply

– Credit crunch


• In many cases rents do not cover the mortgage interest


– Speculation


• Problem of inflation: B of E reluctant to reduce rate



Inflation rates for (a) flats and(b) semi-detached houses

Inflation rates for (a) flats and(b) semi-detached houses

(a)(b)

* projected


• Short-term: probably fall– Credit crunch



– Speculation



– North fall more than the south




– Speculation





Quarterly inflation rates for (a) the north and(b) the south east

Quarterly inflation rates for (a) the north and(b) the south east

(a)

(b)





– Speculation




• Long-term: probably rise– Demand will probably outstrip supply




– Speculation




• Long-term: probably rise– Demand will probably outstrip supply

What can the government do?What can the government do?

• Demand

– Making house ownership more affordable

• Tax relief

• Demand


• Tax relief

• Schemes for mortgage sharing

– But ultimately increases demand

• Supply



• Supply

What can the government do?What can the government do?

• Demand


• Tax relief

• Demand


• Tax relief



• Supply



• Supply

– Relaxing planning regulations

– Public housing

– Relaxing planning regulations

– Public housing

Housing as a barometer of the economyHousing 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.

• 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.

The UK Housing Market A barometer of the economy? The UK Housing Market A barometer of the economy?

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