Reasons for the changes in the housing market

One of the biggest issues of the UK economy if the constant changes in the housing market. using the above article passage and any other you may research, write a report analysing what are, the main reasons for those changes. Is the mocroeconomic or the macroeconomic environment the one that affects prices most? Are the property market challenges linked more to supply or demand?, or maybe we have to consider macroeconomic issues like the exchanges rates, growth and unemployment?

The economy of the UK is dependent on the housing market which plays a vital role. It is worth noting that the housing market influences the economic growth, financial stability and the transmission mechanism of the UK monetary policy. The relevance of the housing market has risen due to the large portion of the household income that is involved in the purchase of the houses. The UK housing market is signified to be a volatile market. Two crucial booms and busts have been experienced by the UK housing market. (Bates, Giaccotto and Santerre, 2014)

The governor of Bank of England, Mark Carney in an interview at the Sky’s Munaghan Show has expressed his major concern on the volatile and the recent boom in the housing market. The huge expansion in the housing market in the UK can pose a big threat to the economy of the UK. The problem in the housing market is aggravated by the shortage in the supply of houses. This adverse situation can be handled if the banks cautiously sanction loans and mortgages to those individuals who has the affordability to repay back the loans. (Osborne and Monaghan, 2014)

There are several reasons behind the fluctuations in the price of the houses in the UK. Some of them are discussed below:

Economic Growth- the house can be considered as a normal good with positive income elasticity. This means with the rise in income of the individual, the purchasing power of the individuals increases so that they can now purchase more of the housing commodity. Despite the economic slowdown the economy of the UK has experienced GDP growth in the third quarter of 2014 which made the country the fastest growing G7 economy. (Allen, 2015)

(Tradingeconomics.com, 2014)

The chart shows that the there has been substantial GDP growth in the UK over the two years. This implies that the people now have increased income and they can make purchases of the house. this increased income and the positively income elasticity of the house enabled the demand for houses to expand in the country. Thus a situation of excess demand crept in the economy due to shortage of houses and thereby the price of the houses has increased. (Bank of England, 2015)

Unemployment- the GDP growth in the UK over the two years automatically implies that there has been a decrease in the rate of unemployment or increase in the rate of employment. The employment in the country increased to 73%. The increase in the employment implies that the people are now wage earners. They have income to make purchases of houses. This ability for the people to purchase increased the demand for houses. This again created a situation of excess demand for houses driving up the price. (Gov.uk, 2014)

Factors affecting the price of houses

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We can see from the graph that the rate of unemployment has decreased over the year 2014-2015. This means that more people are now employed earning wages. The increased income pushed the demand for houses up which helped the prices to increase.

Rate of Interest- the rate of interest over the year 2014-2015 has been stable at 0.5% in the country. this means that the consumer confidence have been strong regarding their mortgage payments for houses. The low interest rate would lessen the mortgage payments.

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The stable and low interest rate as depicted in the graph implies that consumers can now apply for loans and mortgages as the payments will be low. This drove up the demand and thereby increased the price of the houses.

Consumer confidence- on one hand the consumer confidence depends on the interest rate. With low interest rate consumer can acquire loans and increase the demand for houses. On the other hand, the consumer confidence also depends on the rise and fall in the price of the houses. Both the effects can increase the demand for houses and this in turn could raise the property prices.

Supply- The shortage of houses is an inevitable issue throughout the world. As the population is increasing at a geometric rate, the demand for houses is increasing. The availability of the houses could not satisfy the expanded demand. This gave way to excess demand condition driving up the price.

For the determination of price in the housing market, we introduce the demand and supply mechanism in the market.

From above diagram we see that the demand curve DD and the supply curve SS intersects to determine the equilibrium price P₀. But as the demand for houses increased which is indicated by a rightward shift in the demand curve to DD_1­ a situation of excess demand came which will eventually increase the price of the houses. (Goodman and Muth, 2015)

It is to be kept in mind that the demand and supply of the houses are determined by macroeconomic and microeconomic factors. The analyses of the macroeconomic and microeconomic factors that affect the property price are discussed below. (This is Money, 2014)

1. Population Growth-the population growth highlights the issue of shortage of houses which exerts a pressure on the demand for houses. The Malthusian Population theory proposes that the population increases at geometric rate which implies that a minimal change in the population would leave the new entrants homeless. Thus, the increased demand who again drive up the price.

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The growth in the population of UK over the years implies that there is a huge pressure on the demand for houses which increased the price of the houses.

2. Employment and wage- the GDP growth causes employment to increase thereby increasing the wages. The wage growth implies that the people have increased income with which they can make purchase of house. This augments the demand for houses and thereby increases the price.

Macroeconomic factors

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3. Financial relaxation- the facilities of acquiring the loans and the mortgages by the individuals have been eased out and relaxed by the policies and initiatives taken by the government and the banks. This enabled the consumer to gain confidence to take home loans and increase the demand for houses, ultimately increasing the price of the houses. The mortgage approvals have increased in the year 2015 which enabled the individuals to take loans and mortgages easily. (Spence, 2015)

(Tradingeconomics.com, 2014)

4. Land Scarcity- there is a pressure on the availability of land due to the increasing population. This exerted an upward pressure on the housing market. The scarcity of land implied that there is an excess demand for houses which eventually increased the price.

5. Exchange rate- the depreciation in the exchange rate would make the domestic currency cheaper and this would enable the foreign buyers to increase their demand for houses. This would again create a situation of excess demand which drove up the price. The appreciation of the domestic currency would decrease the demand for houses and pull down the price of houses. (Sawer, 2014)

Location and facilities- the price of the houses depend on the location and different amenities associated with the houses. The access to the highways, roads, railways, schools, hospitals, shopping malls add to the intrinsic value of the houses. The price of the houses in this location can drive up the price. If the houses have the features of parking, lifts, swimming pool, community halls etc. would also influence the price of the houses.

Government plans- government sometimes takes an initiative to improvement the infrastructure and communication of certain backward areas. This enhances the value of the houses and the locality. The price of these houses increases accordingly.

Architectural design- the value of the houses also increases if the architectural designs are impressive and attractive. This would drive up the price of the houses.

Tastes and preferences- the tastes and preferences of the property buyers may influence the price. Sometimes the buyers may seek houses in the countryside or near a river bank, which raises the price of the houses in those locations. (THE UK HOUSING MARKET ANALYST, 2014)

Thus, it can be seen that the macroeconomic and the microeconomic factors affect the price of the houses. But the significance of the macroeconomic factors are crucial to the housing market. (Bates, Giaccotto and Santerre, 2014)

The most important issue of the housing sector is the shortage of supply of houses in the UK. The demand for houses in the country has increased due to GDP growth, increase in the population, drop in the unemployment rate and stable interest rate augmented the excess demand for houses in the UK which increased the price in the housing market. Thus, it is very important for the government of the UK to implement steps to increase the availability of houses in the country. (Milligan, 2014)

Conclusion:

The downfall of the economy due to the boom in the housing market would cause a severe imbalance in the economy of the UK. Government should take measures to increase the supply of houses through incentive to the house builders, sanction of new housing projects and relaxing the facilities of loans. These measures would help to increase the supply of houses and moderate the price of the houses. In this context the macroeconomic factors help to stabilize the price of the housing market. (Do policymakers need to cool the UK housing market?, 2014)

References:

Allen, K. (2015). UK on track to be fastest growing G7 economy despite slowdown. The Guardian. [online] Available at: https://www.theguardian.com/business/2014/oct/24/uk-economic-growth-slows [Accessed 1 Apr. 2015].

Bank of England, (2015). Financial Stability Report June 2014. Bank of England.

Bates, L., Giaccotto, C. and Santerre, R. (2014). Is the Real Estate Sector More Responsive to Economy-Wide or Housing Market Conditions? An Exploratory Analysis. The Journal of Real Estate Finance and Economics.

Do policymakers need to cool the UK housing market?. (2014). Economic Outlook, 38(2), pp.5-13.

Goodman, A. and Muth, R. (2015). The Economics of Housing Markets. Taylor & Francis. Copyright.

Gov.uk, (2014). Largest employment rise in over 4 decades – Press releases – GOV.UK. [online] Available at: https://www.gov.uk/government/news/largest-employment-rise-in-over-4-decades [Accessed 1 Apr. 2015].

Milligan, B. (2014). Budget 2014: The housebuilding challenge. BBC News. [online] Available at: https://www.bbc.com/news/business-26475255 [Accessed 1 Apr. 2015].

Osborne, H. and Monaghan, A. (2014). Bank of England governor warns of a bubble as UK house prices rise 10.5%. [online] the Guardian. Available at: https://www.theguardian.com/money/2014/jul/15/ons-uk-house-prices-may-london [Accessed 1 Apr. 2015].

Sawer, P. (2014). Bank of England Governor issues warning over housing inflation. The Telegraph. [online] Available at: https://www.telegraph.co.uk/finance/bank-of-england/10838355/Bank-of-England-Governor-issues-warning-over-housing-inflation.html [Accessed 1 Apr. 2015].

Spence, P. (2015). Mortgage approvals hit six-month high as house prices ‘set to rally’. The Telegraph. [online] Available at: https://www.telegraph.co.uk/finance/economics/11503774/Mortgage-approvals-hit-six-month-high-as-house-prices-set-to-rally.html [Accessed 1 Apr. 2015].

THE UK HOUSING MARKET ANALYST. (2014). 1st ed. [ebook] Capital Economics 2014. Available at: https://www.capitaleconomics.com/uk-housing-market/the-uk-housing-market-analyst/housing-market-activity-starts-to-cool.pdf [Accessed 1 Apr. 2015].

This is Money, (2014). House prices rise across the UK but London has caught a chill. [online] Available at: https://www.thisismoney.co.uk/money/mortgageshome/article-1671748/House-prices-What-expect-news-predictions.html [Accessed 1 Apr. 2015].

Tradingeconomics.com, (2014). United Kingdom | Economic Indicators. [online] Available at: https://www.tradingeconomics.com/united-kingdom/indicators [Accessed 1 Apr. 2015].