Housing Market

INTRODUCTION

A study of housing market requires an analysis of its structure and mechanism of demand and supply in determination of production and prices of new houses, income and financial circumstances determine the demand of house and for this reason the housing is considered as a political controversy (Stafford. D, 2001, the economics of housing policy, London)

In order to describe the house prices for the last three years, and what will happen in the next two years. We will open the literature of Halifax price index and nationwide house prices index to compare the movement/shift house prices. The Halifax and nationwide take all the material on latest house price from the altered reviews that contain, nationwide self, Halifax, Home track, Right move. The Halifax index depends mostly on the information of housing and gives the most popular series of ant other index

CURRENT HOUSE PRICES (Jan 2009 to Jan 2010)

According to house price index published by nationwide and Halifax, the house prices rose by1.2% and 0.6% respectively in January 2010. This was the eight successive monthly increases and takes the average price to 9.9%according to Halifax index .January's rise was more modest than in any of the previous seventh months. Further increase in the supply of property is possible over the coming months. Overall, Halifax current view is that house prices will be flat during 2010.

Despite the economy's unconvincing exit from recession, the aggressive cuts in pay inflation have both upside and downside implications for house prices. With pay inflation near zero or even negative, every additional increase in house prices worsens housing affordability.( http://www.nationwide.co.uk/hpi/historical/Jan_2010.pdf).

Following is the table and figures showing the changes in house prices from jan2009 to Jan 2010 current house price index and this data are taken from nationwide.

Table (1.1) http://www.nationwide.co.uk/hpi/historical/Jan_2010.pdf

Month

Monthly change %

Latest 3 months on 3 months %

Annual change

%

Average price

Jan 2009

-1.3

-3.8

-16.6

150,501

Feb

-1.8

-4.6

-17.6

147,746

Mar

1.3

-3.8

-15.7

150,946

Apr

-0.1

-2.8

-15.0

151,861

May

1.3

-0.1

-11.3

154,016

Jun

1.1

1.3

-9.3

156,442

Jul

1.4

2.8

-6.2

158,871

Aug

1.4

3.3

-2.7

160,224

Sep

1.0

3.8

0.0

161,816

Oct

0.6

3.6

2.0

162,038

Nov

0.6

3.0

2.7

162,764

Dec

0.5

2.3

5.9

162,103

Jan 2010

1.2

2.1

8.6

163,481

According to Martin Gahbauer, Nationwide's Chief Economist,

House prices strengthened their upward momentum at the start of 2010, increasing by a seasonally adjusted 1.2% month-on-month in January. The 3 month on 3 month rate of change - usually a smoother indicator of the near term trend - dipped slightly from 2.3% in December to 2.1% in January, but this primarily reflects the smaller price increases recorded in November and December. At £163,481, the average price of a typical UK property cost 8.6% more than a year earlier in January, up from 5.9% in December. Unless there is a fall in property values in February, annual house price inflation is likely to move into double-digit territory next month for the first time since May 2007. http://www.nationwide.co.uk/hpi/historical/Jan_2010.pdf

FACTORS

Ø House prices increased by 1.2% in January. Prices rose for the eight consecutive month, but January's rise was the lowest during this period after June.

Ø Low supply of properties for sale has been another factor pushing up house prices. There are some signs that the improvement in market condition, Instructions to sell increased for the seventh successive month in December, helping to increase the stock of properties available for sale.

Ø Low mortgage rates have reduced the burden of servicing mortgage debt. Nationally, typical mortgage payments for a new borrower have fallen from a peak of 48% of average disposable earnings in 2007 Quarter 3 to 32% in 2009 Quarter 4.

Ø House prices in January were 8.6% higher on an annual basis. This is the largest increase in the annual rate of change - measured by the average for the latest three months against the same period a year earlier - since February 2008.(source is nationwide surveys)

HOUSE PRICES IN JAN 2008 TO DEC 2008

According to the survey of nationwide in Jan 2008 is a difficult year, the house prices fell by 0.1%and there was an annual change in 4.8% in Dec 2007 to 4.1% in Jan 2008.so the beginning of 2008 is not a very good year for the house market. And the demand is also bottomed out. However the price of a typical property is still 4.2% higher than a year ago but in December the house prices fell more to 2.5% and the typical house price fell by 2.5%. And the annual fell reach to 15.9%.following is the table and figure to show the changes in prices for the year JAN 2008 TO DEC 2008. (TABLE 1.2)

MONTH

MONTHLY INDEX

MONTHLY CHANGE

%

LATEST 3 MONTH ON 3 MONTHS %

ANNUAL CHANGE

%

AVERAGE PRICE

JAN

365.1

-0.6

-0.5

4.2

180,473

FEB

361.8

-0.9

-1.3

2.7

179,358

MAR

357.4

-1.2

-2.1

1.1

179,110

APR

353.0

-1.2

-2.6

-1.0

178,555

MAY

343.7

-2.6

-3.7

-4.4

173,583

JUN

340.1

-1.1

-4.4

-6.3

172,415

JUL

334.2

-1.7

-5.1

-8.1

169,316

AUG

327.9

-1.9

-4.9

-10.5

164,654

SEP

322.5

-1.7

-5.0

-12.4

161,797

OCT

317.9

-1.4

-4.9

-14.6

158,872

NOV

316.8

-0.4

-4.5

-13.9

158,442

DEC

308.9

-2.5

-4.2

-15.9

153,048

TABLE|(1.2)

This disruption in the financial markets worsened throughout 2008 and had larger implications for the economy .According to the Fionnuala Early, Nationwide's Chief Economist “The reduced access to credit's become a catalyst for declines in housing market activity. A combination of the initial price falls and the slowdown in the real economy prompted a further price declines. The incentive to enter the house market evaporated and buyer demand decreases instantly. As a result, housing market activity plunged to the lowest levels ever recorded and house prices fell sharply” (http://www.nationwide.co.uk/hpi/historical/Dec_2008.pdf)

There are some factors caused the decline in house prices in 2008.some of these major factors are as below:

Ø The lack of mortgage finance is one of the most significant factors in falling demand for housing; mortgage lenders are requiring large deposits. This makes it difficult for first time buyers to get a mortgage.

Ø The house prices to incomes is 50% higher than the long term average (1975-2005) Source (Economist - Housing survey) this problem has been exacerbated by the credit crisis.

Ø House Prices can Fall even with limited Supply, In the 1980s there was a boom in house prices in Japan. Since then the peak of 1991 house prices in Japan have fallen for 14 consecutive years,(http://www.mortgageguideuk.co.uk/housing/house-price-fall.html)

Ø It is becoming difficult for first time buyers to get the property. This is mainly due to the rise in house price to earnings ratio. For example, in the past, the Abbey National lent 5 times a borrowers salary. The Credit crunch has now made this difficult.

Ø In a research paper Alex Hamilton argues that a lot of the rise in demand is caused by market sentiment rather than economic fundamentals. The OECD stated that 15% of UK house prices were not reflected in economic fundamentals ‘speculation'. As house prices fall, there is no incentive to buy. Many are waiting for house price falls to end. source(source Speculative Nature of Housing Market )

Ø The number of new houses built is relatively small. Therefore a change in demand magnifies any change in price. It only takes a small rise in demand to increase prices. But similarly it could only take a small fall in demand to cause significant price falls as in 1991.

Ø Many economists predict significant house price falls. Mr. Calverley, argues in his book, 'Bubbles and how to survive them', that house prices could fall by 50%. Former advisor to Gordon Brown David Miles also predicts falls in house prices. He points that much of the rising demand for housing is speculative.

Source (http://www.mortgageguideuk.co.uk/housing/house-price-fall.html)

HOUSE PRICE FROM JAN2007 TO DEC2007

In 2007 the house prices, increases 0.3% in Jan and then continuously increasing till the end of year except last two months. Although house prices was expected to remain firm in spite if rate rises.in 2007 the bank of England also raised interest for the third consecutive months in a six months' time. House prices rise in the beginning of year, the smallest monthly rise since May last year, which pulled the, Annual rate of house price growth back into single digits. Prices increased at an annual rate of 9.3% in January, down from 10.5% last month. The price of a typical house now stands at £173,225. Interest rates also affect house prices; higher rates will reduce new demand to some extent. First-time buyers will now find it more difficult to enter the market as mortgage payments take up a greater proportion of income; following is the figures and diagram stating the changes in house prices in the year 2007.and this data is taken from the nationwide house price index.

MONTHS

MONTHLY INDEX

MONTHLY CHANGE %

LATEST 3MONTHS ON 3 MONTHS%

ANNUAL CHANGE %

AVERAGE PRICE

JAN

351.0

0.4

3.7

9.3

173,225

FEB

353.0

0.6

3.3

10.2

174,706

MAR

354.9

0.5

2.5

9.3

177,083

APR

357.8

0.8

2.0

10.2

180,314

MAY

359.4

0.5

1.7

10.3

181,584

JUN

363.0

1.0

2.0

11.1

184,070

JUL

363.1

0.0

1.9

9.9

184,270

AUG

365.1

0.6

1.8

9.6

183,898

SEP

367.4

0.6

1.4

9.0

184,723

OCT

371.2

1.0

1.7

9.7

186,044

NOV

368.2

-0.8

1.4

6.9

184,099

DEC

366.4

-0.5

0.9

4.8

182,080

As we can see form the table that in 2007,UK house prices fell by a seasonally adjusted 0.5% in December, recording their second consecutive month- on-month fall. The annual rate of house price inflation fell to 4.8%, The average price of a UK property rose by £8,334 over the last 12 months, leaving it at £182,080 at the end of 2007. The three-month on three-month rate of growth - a smoother indicator of house price trends - fell from 1.4% in November to 0.9% in December.

FACTORS:

Ø The Credit Crunch has been hitting the UK housing Sector hard as many easy credit mortgage deals have been removed.

Ø Demand is responding to the pressures of weak affordability, past increases in interest rates and the lower house price expectations.

Ø As funding conditions have tightened and risk aversion has risen amongst banks, there has been a decline in the availability of mortgages the borrowing spectrum and an increase in their price

Ø In 2007 there had not been a building boom in the UK housing markets. However in 2007 this would bring a huge supply of overpriced properties that would require ridiculously high rentals to prove profitable.

Ø 2007' as supply has fallen so has the average value of loan offered for house purchases which peaked at £159,600 2006, and now averages at just £116,700 in 2007'. This is highly deflationary for UK house prices and implies reduction in house prices of £42,900 against an actual price

Ø UK unemployment has probably already risen above 2 million this confirms that the UK housing market is at least 15 months away from a period of stabilizing in nominal terms i.e. where house prices stop falling.

Ø Source(http://www.marketoracle.co.uk/Article8080.html) (http://www.nationwide.co.uk/hpi/historical/)(http://www.nahb.org/reference_list.aspx?sectionID=140)

FUTURE FORECAST FOR HOUSE PRICES IN UK

Significant deterioration in 2008 and 2009 has motivated downward revisions to housing market forecasts for 2009-2010. Financial market stress and the resulting credit crunch have been in scope, affecting all regions and pushing all housing market down. Rising unemployment, particularly rarely in some areas, has severely damage consumer confidence and leading to lessen demand for housing market. House prices are a critical element to a market. House price appreciation and depreciation have varied in different region. Recent house price declines have returned some areas to more normal balance between house prices and incomes, other areas unfortunately, remain significantly out of balance and are vulnerable to further price declines.

(Source http://www.nahb.org/generic.aspx?sectionID=140&genericContentID=58215)

The future path of interest rates becomes more critical for the housing market. The consensus view is that interest rates will remain unchanged until the final quarter of 2010 and possibly longer, as outcome created by the recession bears down on inflation over time and, Inflation has consistently been higher than analyst estimates. Even with the impact of the VAT cut and other tax changes, it did not even fall.

CONCLUSION

In a perfectly competitive market, the demand of house is equal to the actual stock of house (supply).in equilibrium, the revenue will be equal to the marginal cost of housing stock and any change in the rate of return or n the rate of expense will change the actual stock of housing. The quantity of housing is more or less, the increased demand raises the rate of return on housing.as the demand of housing exceeds the actual stock then the marginal return exceeds the marginal rate of expenses. Two set of factors are distinguished to determine the value of houses i.e. physical attribute and the location. (source Stafford. D, 2001, the economics of housing policy, London).The bank of England has main instrument, to set the interest rates. This is a key factor of achieving the (house) prices stable. And another important instrument is emergency lending to banks in any critical condition, used to get the financial stability in prices. (Source GOODHART C, HOFMAN House prices&macroeconomy, 2007)

During the study of literature and facts and figures given by nationwide and Halifax and some other surveys for house price we have taken some important points that can cause change in house prices. IN UK there are some important factors, that can cause a effects the prices (demand &supply) of house. These factors are describes as follow:

Economic Growth / Real income. The more is income, the more people spend on house. Normally there was a mortgage ratio of 3 times your salary. For example if earning is £10,000 the building society would lead £30,000. Therefore rising incomes enable house prices to rise. However, the ratio of house prices to income can vary considerably. If the economy goes into a recession and unemployment rises, the demand for buying houses would fall significantly.

Interest ratesInterest rates directly affect the house price, by increasing or decreasing the mortgage amount. Interest rates are very important as repayments are usually the biggest part of a homeowner's monthly spending. The Bank of England is responsible for setting the interest rates. Sometimes the Bank of England cut interest rates, but, some banks don't pass these cuts onto consumers. In the first half of 2008, the Bank of England cut rates by 0.5% from 5.5 to 5.0%, but the cost of mortgages is still rising.

Speculation property investor buys houses to make income from renting. Investors buy when house prices are rising and sell when the market appears to turn. This makes house prices more volatile because speculators will buy in a boom and sell in a bust. The number of buy to let investors in the UK has risen by the time.

Consumer confidence Before 2007people have confidence and are more willing to buy a house, because100% mortgages and interest were quite common. In the early 00s, people were optimistic about the housing market and so took out mortgages with a higher debt to income ratio.

RentingIn UK house prices have increased faster than inflation, renting has also become expensive which is the main substitute to buying a house

Unemployment Low unemployment is also causes rising demand for houses.

SupplyIn the short run Supply of housing is fixed because it takes time to build houses. Therefore in the short run demand affects prices more than supply, However if the supply of housing is inelastic then an increase in demand will lead to an increase in price.

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