Examination of UK House Price Changes
In the UK economy, housing market is one of the influential markets and it highly affects the economy of the country. The fact that 78% of the houses are privately owned causes this situation. In Europe, UK has one of the biggest home ownership numbers. In UK, housing is a sign of being prosperous. The biggest part of UK debt is mortgage dept. Each person has £21,000 mortgage dept. Consumer confidence and assumptions are highly depends on house prices (Pettinger, 2007a). After the 70's, there has been some serious disputes in the housing market. Actually, the market has experienced several increases and decreases. For example, 2007 was a year of crash for the market and it has started to get better since then. Housing prices in the UK up to date, important determinants for house prices and predictions for the price trend for the next two years are the topics which are essential to be examined within the context of this study. Firstly, house price trend in the last three years will be studied; secondly, to define the determinants of house prices, supply-demand theory will be analysed with the main realities; lastly, price movements in the future will be predicted in accordance with the given data.
In the period spanning from 1996 to 2007, there has been 200% increase in British house prices. In the last three months of 2007, property prices in UK reached its highest level. Subsequently, global financial crisis and significant economic decline in the second quarter of 2008 caused interest rates to increase, circumstances to become harder and made the house price falls quicker. Approximately 250,000 British depositors have experienced heavy losses because of bankruptcy of banking system in Iceland and this event has worsened the environment (Global Property Guide, 2009).
In the period spanning from the third quarter of 2007 to the first three months of 2009, the highest price falls have occurred in the lands which have faced with the biggest price rises in the crash. In the first three months of 2009, the housing price in Northern Ireland had experienced a fall of 39.8% in value. In London, this rate was 19.8. In other neighbour countries, this fall rate was 14.1% in Scotland and it was 25% in East Anglia. In the nation, this rate was 10.3% in average (Global Property Guide, 2009).
In the beginning of 2010, the increase in the house prices has continued with 1.2% adjustment in January. The sign shows an easy next term trend, the 3 month on 3 month rate of change has decreased from 2.3% in December to 2.1% in January. However, this is the main indication of smaller price rises performed in November and December. The average price of a normal UK property cost increased as 8.6% in January 2010 from 5.9% in December 2009, at £163,381. In the figure below, there is the illustration of annual percentage change in house prices in the period spanning from January 2007 to January 2010 (Nationwide, 2010). In the figure below, there is the illustration of annual percentage change in house prices in the period spanning from January 2007 to January 2010.
Source: Nationwide (2010)
The characteristic of housing market having similar features with other markets of goods because of its aspect to be performed between buyers and sellers requires the supply-demand theory to be examined to define the main reasons of market crash and recovered it afterwards. Thanks to this closeness, supply-demand theory could be applied to study the prices changes. According to this theory, the numbers of goods or services determine the demand and it is described by buyers in line with their purchasing power and needs.
According to this definition, the amount of demand is not required to be the same as the bought quantity. If the costumers are able to buy what they demand, the desire to buy becomes a demand (Parkin, 2003). According to Parkin (2003), supply is defined in this theory as the amount of provided goods or services planned by the manufacturers to be produced at the specific time period.
This theory supposes every goods or services offered in the market to have their own prices in line with the purchasing power of consumers. But, if the producers supply less goods or services than the amount of customer demand, the market faces with a shortage which causes the increase in the price of goods. In this case, specific goods can be bought by specific consumers and the market price will be increased after the actions of abovementioned buyers. In contrary, if the producers supply more goods or services than the amount of customer demand, the market faces with a decrease in the prices, in line with the supply-demand relationship. This relationship between supply and demand will go on to find a point of equilibrium to stop these changes. This point helps both parties by providing the producers with the amount of supply to be produced while the consumers find their demand according to their purchasing power.
The demand and supply curves depend on various determinants. Earnings and prosperity of buyers, their inclination and choices, price levels of said goods and services and predictions of consumers for the future price of product are the additional issues that define the demand.
The most effective elements that define the demand for goods are income and wealth. According to the definition of demand, the desire to buy a product or service is not accepted as a demand without having enough purchasing power. The increase in the actual earnings and wealth of costumers causes the demand for the products to increase as a result of the rise in the buying power (Anderton, 2006).
The inclination and choices of buyers also affect the demand. The demand for a product is formed by the inclination and choices because of their characteristics to affect the preferences. The increase in the demand for a product can be occurred if the said product is in the latest style, besides the cultural issues (Moynihan and Titley, 2000).
Additionally, the price of a companion or alternative of a product is another significant issue. Any linked product can be counted as a companion or alternative of a product. For this reason, the price of a companion or alternative of a product highly affects the demand for it. There is a parallelism between the falls of the price of an alternative product and the demand for the said product. Also, if the companion's price drops, there will be a rise in the demand for other product (Moynihan and Titley, 2000).
Predictions of consumers for the future price of product also have an influence on the demand for a product. There is a tendency to purchase a product when it is predicted to be raised in terms of price. Accordingly, the demand curve is influenced by the market's capacity. There increases a demand for goods which has its own high population of customers (Anderton, 2006).
Moreover, the supply curve is affected by various determinants such as production costs, technology used in the production, government taxes and subsidies, price of the alternative product and number of manufacturers in the industry.
The supply curve is mainly influenced and shifted by the production costs. Businesses can supply numerous products to profit more if the production costs are not high regarding the market price (Samuelson and Nordhanus, 2001).
Additionally, the supply of products is affected by the technology used in production. The quantity and quality of supplies are mainly based on technology used in production. The supply of the products can be raised by applying high technology in production (Anderton, 2006).
The supply also highly depends on government taxes and subsidies. The costs can increase if the government forces a tax on the businesses and they decrease if the government performs a subsidy. Subsidies have an influence to raise the supply with its feature to offer a secure payment from the Government and by doing so; the businesses can supply more goods with the lower costs (Anderton, 2006).
The supply is also defined by the price of the alternative of a product. In fact, the alternative product can be a result of a production in which the similar elements used. For this reason, the supply of products is highly influenced by the alterations in the price of alternative product (Anderton, 2006).
Additionally, the total market supply highly depends on the capacity of the market in terms of producers. The rise in the market supply can be found if the new businesses enter the market and this situation generally lowers the market price. The market price can be increased with the entrance of new producers and it also causes a variety of alternatives (Anderton, 2006).
It's the characteristic of housing market to have similar features with other markets of goods because of its aspect to be performed between buyers and sellers. Thanks to this closeness, supply-demand theory could be applied to study the prices changes. But, supply and demand are very easily affected issues against alternations in the housing market. Also, the house prices in a free market can be affected by several issues. In the short-run and long-run, the property prices are defined by various determinants. These determinants which have an influential effect on each other can be classified as complex and apparent.
Since 1995, the demand for new property was not in step with the supply of new homes in UK and this is called as Slow House Building. In the recent UK housing market, the biggest and main macroeconomic challenge is the abovementioned issue. Brown field housing policies of the Government is the main point in the supply issue. These policies aim at protecting respected greenbelt and regions. Because of these policies, the builders could not build houses in the greenbelt and this caused the lack in the supply. Today, it is not possible for England to house its people after this challenge occurred in the supply. According to DTI, it is needed to build 4 million properties by 2017 and this shows that it is required to supply one million houses in line with the demand. For 77 years, there has not been experienced such a lower rate of house building in this region (Homes-for-rent.org.uk, 2010).
In the last three months of 2009, the UK economy has been getting in a better condition from the economic decline but this recovery is very slow and it is a complicated issue. Actually, the economy has not faced serious decline for months but there is not satisfactory improvement and it is still not normal. The forecasts regarding the economy shows a growth in the financial conditions but it is not enough to save the housing market since it has fallen in a very bad condition in terms of economy. The situation was the opposite in 2007-2008. During this period, the economy was in a better condition but the housing market has declined very rapidly (Nationwide, 2010).
The recovery in the economy was very well received among the labour market figures regardless of its unsatisfactory feature. The rate of unemployment has experienced a decrease in November and this was the first since February 2008. In December, the rate of benefit claimants who are unemployed was declined for the second time. But, these rates which seem good do not show some amendments applied in the labour market such as the average pay. During 2009, growth of UK average earnings has faced with the bottom rate of decrease (Nationwide, 2010).
Considering the house prices, there are positive and negative indications of the assertive cuts in the pay inflation. The power to buy a house has weakened because of extra increases linked with zero or negative pay inflation. Besides, people have continued to work to meet their mortgage rates when the rates of interest are lower thanks to the pay restraint. Consequently, selling the houses because of financial problems has not been a choice any longer (Nationwide, 2010).
In the housing market, the future of interest rates has become more of an issue after the negative actual income growth. Until the last three months of 2010 and maybe longer than this date, there will be no alteration according to a general opinion. On the other hand, the firmness of this opinion has been criticised after the inflation trends in 2009. The predictions of analysts have been lower than what inflation performed and deflation has not occurred which has been predicted to accrue in the beginning of 2009 (Nationwide, 2010).
The housing market becomes unpredictable because of shortage of housing. If there is an alteration in the demand, the supply cannot meet it. Therefore, it makes the price higher since the demand is not responded. The house prices has been raised quickly mainly because of the abovementioned problem. In UK, the house supply has raised for several issues. Local officials have the power to delay and stop housing activities. Another problem is that there is not enough land to meet the demand. For example, it is almost impossible to build houses without invading the greenbelt. This causes a trade-off between the economic authorities and pro-environment people. Retardation time is the final problem about this issue. Legislate new regulations and carrying them into effect takes several years in the UK. This is because of the fact that there are challenges faced in planning and building. All these factors cause price volatility in the housing market (Pettinger, 2007b).
These facts suggest that in next couple years, house prices will continue to rise due to under-supply of new housing. Therefore getting on the housing ladder will be harder. This is because the rise in house prices will be higher than increase in earnings of buyers. Consequently, the middle class will not have the opportunity to purchase a house. These factors will increase the volatility of house prices as inflation-driven price increase will cause another market crash unless the government will intervene to the market and support supply side of the market to boost the number of houses supplied to the market.
Anderton, A. (2006) Economics (4th Ed.), Essex: Pearson Education
Moynihan, D. and Titley, B. (2000) Economics: A Complete Course (3rd Ed.), Oxford: Oxford University Press
Parkin, M. (2003) Microeconomics (6th Ed), New York: Pearson Education
Samuelson, P. A. and Nordhaus, W. D. (2001) Microeconomics (7th Ed.), New York: McGraw Hill
Global Property Guide (2009) “House Prices Move up in UK” published on 29 October 2009 available at: http://www.globalpropertyguide.com/Europe/United-Kingdom/Price-History
Homes-for-rent-uk (2010) “Factors Affecting Property Prices” available at: http://www.homes-for-rent-uk.org.uk/main/factors-affecting-prices.htm
Nationwide (2010) “House Prices Make a Strong Start to 2010” available at: http://www.nationwide.co.uk/hpi/historical/Jan_2010.pdf
Pettinger, T. (2007a) “The Effect of the Housing Market on the UK Economy” available at: http://www.economicshelp.org/labels/UK%20housing%20Market.html
Pettinger, T. (2007b) “Should Govt Increase the Supply of Housing in UK” available at: http://www.economicshelp.org/labels/UK%20housing%20Market.html