Housing market analysis

Strategic And Innovative Marketing

Executive Summary

The purpose of this study is to analyze changes in house prices over the last three years and prediction of house pricing market within next 1-2 years. Also this report will look into two main economic forces creating prices which are demand and supply, factors of those forces and role of government in determination of the house prices on the market. Data used during this study is drawn from both primary and secondary sources and they serve to illustrate this points that have been made. The work concludes with some suggestions as how the factors that have been identified in the course of this work could be surrounded by investors.

I. Introduction

Housing as a one of the basic needs according to Maslow's 'hierarchy of needs' is providing accommodation in form of buildings or structures that people may live in if certain criteria and regulations met. Pursuit of having own accommodation is one of main goals of individuals around the world.

Housing market in many countries is very important industry. In United Kingdom housing price are deeply analysed and delivered quarterly in form of Housing Price Index by two main mortgage providers: Halifax and Nationwide. Housing Price Index not only describes prices of houses but also suggests trends in supply and demand and wealth of people and economy of the country. If Housing Price Index is going up then investors consider future profits and spending more money on current needs. If Housing Price Index is going down investors reduce current spending to minimum satisfying needs.

Also government may influence demand and supply of houses on the market and therefore will shape prices. Factors considered by government are stamp duty prices, Council Houses supply, changes in monetary policy and benefits system. All of those factors will be dipper analyzed in further part of this assignment.

II. Two economic forces over last free years

It is unquestionable that two main economic forces in form of supply and demand create prices of products or services. Supply is defined as 'amounts of goods and services there are to buy' whereas demand is defined as 'how many people wants to buy those goods and services' (J.R.Adil, 2006). In relation to housing market demand factors will describe how house prices are changing due to changing demand. Respectively supply factors will focus on changing prices when supply of houses changes too.

2.1) Demand change factors

Demand factors taken into consideration within a housing industry are: future price expectations and consumer confidence, mortgage interests' rates available on the market, population and economic growth of national economy.

2.1.1) Future expectations and consumer confidence

Future price expectation and consumer confidence are directly linked with country economic growth. In UK consumer confidence is being researched every month and being presented in percentage. Nationwide by creating monthly Consumer Confidence Index asks

5 questions to about 1000 consumers from different UK regions in order to find out the view of the present and future employment and economic situation along with major spending such as a house purchasing.

The graph below shows Consumers Confidence Index within last 6 years:


Taking into consideration assignment requirements and analysing last 3 years there was

a rapid decrease in Consumer Confidence Index from November 2007 till beginning of 2009. This was determined by general economic recession in form of credit crunch when a lot of employees lost their jobs or had to change jobs for those less paid. From beginning of 2009 till now the consumers' confidence is increasing due to positive signals form economy.

Therefore the demand for houses decreased rapidly between 2007 and 2009 and is rising slightly up from 2009 until now. From 2007 consumers expecting lower prices in the future move plans for purchasing houses. As demand decreased the prices of houses decreased too what caused shift to the left on demand curve.

According to Halifax Pricing House Index there was a significant decrease in house price between quarter 1 of 2007 and quarter 1 of 2009. Pricing Index decreased from base 11.1 in 2007 to -17.5 in 2009. In quarter 2 and 3 in 2009 there was still decrease, however lower than before, by -15 and -7.4 in quarter 2 and 3 2009 respectively. From quarter 4 in 2009 there is an increase of Pricing House Index to level 1.1.

In prices from beginning of 2007 till beginning of 2009 average house prices dropped from '199,612 to ' 163,605. From beginning of 2009 till January 2010 house prices increased to '169,777

2.1.2) Mortgage interests rates

Mortgage interests' rates are very crucial factors determining house prices. In general decreasing interests' rates should increase demand for properties however UK situation was a bit more complicated.

UK mortgages are split into two groups: fixed mortgages (whatever interests' rates will be offered on the market this one will be constantly the same for period between 2 and 10 years) and variable mortgages (when Bank of England change interests rates the mortgages rates will change too).

In relation to housing market decreasing interests' rates from 2007 to the lowest level ever now (from 5.75% in June 2007 to 0.5% till now) did not bring automatic increases in purchasing houses. The recession in UK caused rising requirements by banks in order to give mortgage what make situation where average individual was unable to receive money. Lower mortgage accessibility also caused decrease in demand of houses therefore demand curve shifted to the left making property prices even lower.


2.1.3) Population

Population has also influence in determination of house prises. In general higher population, as a result of immigration for example, causing higher demand for houses. Respectively lower population cases lower demand (W.A.V Clarck, 1982).

For this assignment purposes population is irrelevant factor due to no significant changes in population of United Kingdom within years 2007 and 2010. Also UK Office for National Statistics prove no significant movements of population form London area to suburbs.

2.1.4) Economic Growth

Economic growth emphasizes increase in the production of goods and services. In monetary terms increase will be affected by adjusting inflation rate (P. Arestis, M. Baddeley, J.S.L. McCombie, 2007)

Economic growth brings a power of buying goods whereas economic recession reduces this power. According to the Office for National Statistics in UK from quarter 3 in 2008 there is economic recession that causes higher unemployment rate (7.8% in December 2009) and general decrease in domestic incomes. The economic growth in UK within last few years describe graph below:


In regards to housing market economic growth is one of the major factors influencing prices. If incomes of people decreasing due to recession and the same time money spending decreasing, automatically demand for houses will decrease too. People trying to sell houses in order to achieve the sale are forced to decrease prices to be competitive towards other sellers and fit into not the best demand. Therefore demand curve will shift to the left.

2.2) Supply change factors

In course of this study I take into consideration two supply factors: future price expectations and repossessions of the houses.

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