Housing transaction

Introduction

Housing transaction depends on the price that the seller is willing to agree for his property and the actual price that a buyer is willing and more importantly able to pay.

The housing market is a conjectural place where buyers and sellers of houses meet so as to operate process to buy and sell houses –like the other markets. In this case; the involving object is house which means to receive, to delivery and to hand out big amount of money.

As many economists consider that, one of the most important markets in the economy is the housing market which influences economical balance of all over the country because of processing with a large proportion of currency.

“Housing is a key market in the economy. For many people spending on housing is the largest single item in their budget. ” (Grant, Vidler, 2000,page: 27)

The second difference is for this market from the others, normally transactions are made into two selves (seller and buyer) but in that state one more determinant exists, that is responsible for delivery, estate agents. Therefore; it is not necessary to meet for buyers and sellers, they can pass on their duty to estate agents. And this creates a workplace.

The house prices are made up of equilibrium of demand and supply of buying a house. Moreover there are some factors which impacts to demand and supply in consequence the price will be effected.

Regarding UK house market; The British economy has been experienced many different price rises, declines and levelling offs. The house prices had been rocketed considerably until the recession occurred in UK. Today in the UK, demand for purchasing a house is decreasing.

This essay will be divided in two parts. Firstly, I will give brief information of UK house marketing as recent data proved by s for getting a general idea. Secondly, I will analyse how the house market prices are being influencing by factors that effect demand and supply and finally; in the conclusion part I am going to present my findings, opinions and comments.

Housing market activity

“Levels of activity in the housing market have remained very low in recent months. Mortgage approvals for house purchase fell to a record low of 27,000 in November, and partial s for December suggest there has only been a small improvement since then. House purchase approvals have historically been a good lead indicator of house price movements, and we would not expect to see a stabilization of property prices until approvals recover significantly from current levels. In the past, approvals have tended to move in line with new buyer enquiries at estate agents. More recently, however, the relationship between buyer enquiries and approvals has broken down, with buyer enquiries recovering quite strongly in recent months while approvals have shown little sign of recovery. (Jan_2009 house prices)

“There are several possible explanations for why higher buyer enquiries have not translated into higher approvals. First, those enquiring about properties in the current economic environment are unlikely to be doing so with the same level of urgency as was the case 1-2 years ago. While the fall in house prices and the parallel reduction in interest rates has probably made many households curious about what is currently available in the market, many are likely to be hesitant to commit in a recessionary environment of rising unemployment and increasing uncertainty about future incomes. The fact that house prices still remain high relative to earnings reinforces this more cautious approach among potential buyers. Second, mortgages have become less widely available as a result of heightened economic risk, tighter lending criteria and a decline in the number of lenders who are active in the market. However, the increasing level of enquiries suggests that activity levels have a reasonable chance of recovering from their recent lows once an end to the recession is in sight and/or the recent government interventions lead to an improvement in the availability of credit.

“However, while the economic news is clearly negative and there appears little prospect for noticeable improvement in the short term, it is easy to lose sight of the fact that a considerable amount of stimulus has been provided over the last few months. The MPC has already cut interest rates to their lowest level in the Bank of England's history, and financial market pricing implies that further reductions are to be expected in the next few months. While the rate cuts have so far not had an immediate impact on economic output, this should come as no surprise. Historical experience suggests that interest rate cuts typically take 18-24 months to feed through into the wider economy, so it is certainly still too early to claim that they are having no effect.

“On top of the interest rate reductions since October, there has been an additional monetary stimulus from the exchange rate, which in trade-weighted terms has fallen by nearly 20% over the last three months and 30% since the July 2007 peak. Though the size of the exchange rate fall makes travel abroad and foreign imports more expensive, it is ultimately a major part of the solution to the current economic problems, since a lower exchange rate increases the competitiveness of UK exports and the relative attractiveness of producing and consuming in the UK. As in the case of interest rates, this stimulus will take time to have a discernable impact, given that the UK's major trading partners are still in a deep recession and the process of increasing UK export capacity does not occur overnight. However, over time the fall in Sterling is good news for the economy, especially since the inflationary impact has been dampened by the 70% fall in oil prices since their July peak.

“While none of these stimuli change the short-term picture for the economy, they do provide the path for a future recovery out of recession. Although this is still some way off, it would undoubtedly improve the outlook for the housing market.” (Jan_2009 house prices)

A mortgage is the transfer of an interest in property to a lender as a security for a debt, usually a loan of money.

In the circled area, we see the mortgage approvals between the months January 2008 and December 2008. As you can see, there is a tremendous fall during the credit crunch. The approval of mortgage number was 121,000 on January 2007; however, it fell to 27,000 on November 2008 (see following Table).

Month

Number of Mortgage Approvals

Month

Number of Mortgage Approvals

Dec 08

31,000

Dec 07

72,000

Nov 08

27,000

Nov 07

83,000

Oct 08

32,000

Oct 07

89,000

Sep 08

33,000

Sep 07

100,000

Aug 08

32,000

Aug 07

106,000

Jul 08

33,000

Jul 07

112,000

Jun 08

36,000

Jun 07

113,000

May 08

42,000

May 07

113,000

Apr 08

58,000

Apr 07

109,000

Mar 08

64,000

Mar 07

114,000

Feb 08

72,000

Feb 07

120,000

Jan 08

73,000

Jan 07

121,000

We are now seeing some real declines in mortgage approvals. With the recent credit crunch, financial institutions have tightened their lending criteria. They are no longer willing to take such big risks with their mortgage lending. This affects housing market badly.

There is a connection between interest rate and the mortgage: interest rate mortgage availability D buying house

UK House Prices

Nowadays house prices are falling down. Fionnuala Earley, Nationwide's Chief Economist, stated that “the price of a typical house fell by 2.5% in December, a stark contrast with the modest fall of 0.4% in November. The price of a typical house is now £153,048, around the same level as of spring 2005, but still over £17,500 more than five years ago. (Jan_2009 house prices). According to UK house market statistics UK house prices have fallen significantly in the first 6 months of this year. It is the first major fall in annual house prices since the great crash of 1989 to 2004 where prices fell 20%. The main reason of the this issue is that the shortage of mortgages available after the last financial crises. Moreover , the change in nominal house prices is still very large since 1994. Even a decrease of 10 or 20% will remain prices over the prices 1994. First of all, that below graph shows average house prices in UK market.

The line graph illustrates Average House Prices during the period from 1999 to 2009. There is a significant increase in price between 1999 and 2008. It can be seen that, price of buying houses had been reached a peak point (over than £175.000) at the beginning of 2008 when the global credit crunch occurred and UK big recession started. In economic issues when the inflation and that related factors boom to the highest level after that it is always shown decreasing, as same as last year numbers. The point is; to understand recent day's biggest problem is relevant to the opposite of that idea. Until when will the prices drop to make a dip? And then it needs to grow again. The answer is making some predictions and that predictions related the government policies in UK market.

House prices, ‘Real' House Prices and Trend in ‘Real' House Prices are as following:

Period Covered

House Price

‘Real' House Price

Trend in ‘Real' House Prices

2008 Q4

£156,828

£156,828

£151,712

2008 Q3

£165,188

£164,515

£150,639

2008 Q2

£174,514

£175,498

£149,573

2008 Q1

£179,363

£183,963

£148,515

2007 Q4

£183,959

£189,846

£147,464

2007 Q3

£184,131

£192,500

£146,421

2007 Q2

£181,810

£190,812

£145,385

2007 Q1

£175,554

£187,241

£144,356

Table 1: Nationwide average house prices (Nationwide Building Society, 2009 )

The highest ‘Real' House Price is at the 3rd quarter of 2007, £192,500. Then, a slight decrease occurs in the ‘Real' House Prices. Every quarter we see the decrease and finally it drops to £156,828. These numbers affect future price expectation in terms of buying house. People want to wait and see what is going to happen to the house prices. Martin Gahbauer, Nationwide's Senior Economist, comments that: “The price of a typical house fell by a further 1.3% in January, as the deepening economic recession and financial market turbulence continued to weigh on housing market sentiment and activity. January's decline leaves the average price of a typical house at £150,501, down 16.6% from 12 months ago. However, it is too early to say that this marks the start of a sustained improvement in the short-term trend. (Jan_2009 house prices)

“There is a strong link between the housing market and UK economy. One of the main factors behind the current recession is the falling house prices.” (http://www.housingmarket.org.uk ) house prices

The line graph shows changes in UK house prices since 1985. It is clear that there is a significant decrease after Q1 2007. Generally , UK house market prices increased over 20 years period except 1989-03 and 2007-09. Moreover , the biggest falls in house prices occurred between 89 and 93.

Annual Change in UK House Prices Annual % Change

This line graph illustrates the price changes in UK house market over 10 years annually. It can be seen that house prices rocketed in the beginning of 2000's with the rate of 25%. This situation occurred because of low interest rates , positive economic growth , generous mortgage lending , high confidence , relative shortage of supply. Also in the beginning of 2008s the housing crash started and financial crises made mortgage harder to get. This situation also caused a fall in confidence. Furthermore , house prices continue falling at a rate of 15%.

The Factors That Affect House Prices in UK

A) Consumer Confidence and Future Price Expectations

B) Unemployment

C) Income

D) Interest Rates

E) Government Policies

F) Population

G) Preference

The general information is that: “House Prices determined by demand and supply. If demand rises (i.e. shifts to the right) or if supply falls (i.e. shift to the left), the equilibrium price of houses will rise. Similarly, if demand falls or supply rises, the equilibrium price will fall.” (Sloman, 2004 page:46)

“This is the basic determination of house prices. If demand increases faster than supply house prices go up.” ( http://www.mortgageguideuk.co.uk/blog/house-prices/what-factors-effect-house-prices/)

Consumer Confidence and Future Price Expectations

Confidence plays a major factor in the housing market and this is mainly affected by the general consumer expectations of the housing market growth.

Positive consumer confidence results in more people likely to enter the housing market due to the belief that they investment will rise which in turn supports demand, this is true of homeowners that are not purchasing with the intention to profit. However, a more negative opinion will result in consumers being slower to enter the market on the hope that the current trends will change to a more positive nature.

In a growing market, homeowners will see an increase in their wealth which will increase their confidence and will cause higher levels of consumer spending.

In addition, if house prices rise, consumers can increase spending by remortgaging and they take out larger loans than the value of their homes. Higher levels of consumer spending lead to rising demand and higher economic growth. Consumer spending accounts for 66% of demand, therefore, the effect of rising house prices can be quite significant in determining economic conditions as previously mentioned the housing market is the England's greatest wealth.
Higher house prices can cause inflation because if demand increases then the economy can get close to full capacity, and growth. However rising house prices do not necessarily cause inflation. There can be other factors that can affect consumers such as wages are increasing very slowly or taxes have been increased then consumer spending will be moderate or low. Since 2001 hose prices in the UK doubled however this has not cause inflation because the other inflationary factors were low.

Buying House, £

D0 S

D1

P0

P1

Q

Q1 Q0 Buying House, m.

As it can be seen from the , demand curve is shifting to the left. It means there is a fall in the demand of buying house. This brings cheaper prices, however, less consume of house because of less consumer confidence and low future price expectation.

Unemployment

There is a well-built connection between unemployment and the Housing Market. When unemployment is rising, demand for buying a house will fall. That means if people are made unemployed they will be unable to afford to pay mortgage. And they will avoid taking risk of a mortgage. Unemployment is currently low, but many expect to become worst in economic circumstances In the last hosing crash, two factors contributed to a sharp fall in house prices these were rising interest rates and unemployment( due recession, which in turn was caused by rising interest rates.( Which has changed now but still effecting market)

Buying House, £

D0 S

D1

P0

P1

Q

Q1 Q0 Buying House, m.

As it can be seen from the , demand curve is shifting to the left. It means there is a fall in the demand of buying house. Because of high unemployment there is a fall in buying house demands.

Income

In a supply and demand scenario, the supply of housing (inclusive of land) points up because either there is a short supply of suitably attractive land or because of restrictions (Glaeser and Gyourko, 2002). On the side of demand fluctuations in population and income, we can expect house prices to be fluid. If other alternations to demand and supply are non-moving, then price, population and income will be merged in a way that depends on the fluidity of demand and supply.

Buying House, £

D0 S

D1

P0

P1

Q

Q1 Q0 Buying House, m.

As it can be seen from the , demand curve is shifting to the left. It means there is a fall in the demand of buying house. High unemployment affects the income and income levels go down. As a result demand for house purchase goes down.

Interest Rates

Interest rates have a major and direct implication on consumer finances effecting amongst other things mortgage payments, bills, credit card rates and savings rates.

The reason for this is that lending (mortgages) and savings are aligned in some form or another to the UK base rate. In the current climate, with the UK base rate so low this change is directly effecting both interest rates for consumers across the board, the lower the rate the less the interest on savings and in theory the lower the repayment on mortgages especially with mortgages called trackers will directly follow this rate and can result in considerable monthly savings.

Interest rates have been deliberately cut in the UK due to the current economic situation that is the deepening recession. The reason these rates are lowered is to stimulate the financial markets where in theory, the lower rates make mortgage repayments lower and thus more attractive to the consumer.

Buying House, £

D1 S

D0

P1

P0

Q

Q0 Q1 Buying House, m.

As it can be seen from the , demand curve is shifting to the right. It means there is a rise in the demand of buying house. Normally, today, there is a fall in the demand of house purchase. However, even interest rates are low, there is no rise in the demand. This can be explained with credit crunch.

CONCLUSION

To conclude , looking at all factors , demand for buying house is expected to go up but the price falling will still continue in the house market after the last economical crises. The big reason is that after the last economical crises credit crunch occurred and affected the market in bad way by decreasing the demand of buying houses and there is not enough demand to stop the price fall in the market. However before making investment to the house market , all other factors ,which can be seen above ,have to be reviewed and examined . Making an investment only by looking at the price falls may not be an effective and returnable investment.

This research shows the relation between the house prices and the factors that affects the peoples decisions. It is clear that buyer decisions are affected by lots of factors . Moreover , the world has never seen such a financial crises before in its lifetime . That is why the housing market is coming to life slowly after long time price falls. Lastly , it is clear that the market is getting better day by day but it will take some time for the market to show the past performance.

REFERENCES

McConnell, B. (2002) Economics: Principles, Problems, and Policies, 15th ed., United States of America: McGraw-Hill Higher Education

Economics in Context By Susan Grant, Chris Vidler Edition: illustrated Published by Heinemann, 2000

Capozza, Dennis R., Hendershott, Partic H., Mack, Charlotte, and Mayer, Christopher, J. (2002). \Determinants of Real House Price Dynamics." NBER Working Paper 9262.

Glaeser E. L. and Gyourko, J. (2002). \The Impact of Zoning on Housing Affordability", Mimeo.

Poterba, J. (1991). House Price Dynamics: The Role of Tax Policy and Demography, Brookings Papers on Economic Activity, Issue 2, P.143-183.

Sloman, J. (2004) Essentials of Economics, 3rd ed., Madrid: Pearson Education Limited

Parkin, M. (2003) Microeconomics, 6th ed., United States of America: Pearson Education Limited

http://www.housepricecrash.co.uk/indices-nationwide-national-inflation.php

(Jan_2009 house prices) http://www.nationwide.co.uk/hpi/historical/Jan_2009.pdf

(Dec_2008 house prices) http://www.nationwide.co.uk/hpi/historical/Dec_2008.pdf

http://tutor2u.net/economics/content/topics/housing/housing_demand_supply.htm

http://property.timesonline.co.uk/tol/life_and_style/property/article5196527.ece

http://www.uk-houseprices.co.uk/housing_market/factors_affecting_prices.html

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