The UK Housing MarketA barometer of the economy?

-10

-5

0

5

10

15

20

25

30

35

Per

cent

age

annu

al h

ouse

pric

e in

crea

se (

adju

sted

qua

rter

ly).

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Source: based on Halifax House Price Index (HBOS)

UK house price inflation(annual percentage rates, adjusted quarterly)

Who benefit from rising house prices?

• The losers– The first-time buyer– Those upscaling

• The gainers– Downsizers– Elderly going into homes– Emigrants

• Those largely unaffected– Those not moving– Those moving to another area

where house prices are similar

Who benefit from falling house prices?

• The losers– Those with negative equity wanting to move– Downsizers– People exiting the housing market

• Emigrants• Elderly going into homes

• The gainers

– The first-time buyer– Those upscaling

• Those largely unaffected– Those not moving– Those moving to similar priced houses

Determination of house prices

• Equilibrium in the housing market– Where supply of houses equals demand

• Many different segments of the market

– Price changes caused by shifts in D and/or S• D and/or S P

• D and/or S P

• Problem of inelasticity of supply

Supply curves with different price elasticity of supplyP

Q O

P0

Q0

S1

S2

D0

D1

Q2 Q1

P2

P1

Determination of house prices

• Equilibrium in the housing market– Where supply of houses equals demand

• Many different segments of the market

– Price changes caused by shifts in D and/or S• D and/or S P

• D and/or S P

• Problem of inelasticity of supply– Some lags in price adjustment

• Especially when markets are turning• Currently there is a glut of properties, especially flats,

because sellers are reluctant to reduce prices

Causes of rising house prices

• Shifts in demand: short-term causes– Incomes

• Current and expected– Interest rates

• Current and expected

Halifax variable mortgage rate

Causes of rising house prices

• Shifts in demand: short-term causes– Incomes

• Current and expected– Interest rates

• Current and expected– Availability of mortgages

• Credit rating of applicants• Multiple of income• Required deposit as % of value of property• Problem of the credit crunch

£000s

Ratio of average house prices to average earnings

Source: based on Halifax House Price Index (HBOS)

Causes of rising house prices

• Shifts in demand: short-term causes– Incomes– Interest rates– Availability of mortgages

– Rents (rental property is a substitute good)

– Taxation: stamp duty– Speculation about future

house prices

P1

P

Q O

S1

D1

D2

a

P2 b

Speculation compounding a price rise

People believe that the rise in

price to P2 signifies a trend.

Assume an initial rise in demand

P1

P2

P

Q O

P3

S1

S2

D1

D2

a

b

D3

cThe rise in price

to P2 is compounded by

speculation

Buyers rush to buy now before prices rise any

further.

Sellers hold back, waiting for prices

to rise.

The effect of these shifts is a price rise to P3

Speculation compounding a price rise

P1

P2

P

Q O

S1

D1

D2

a

b

Speculation compounding a price fall

?Complete the diagram by

adding a new demand curve (D3) and a new supply curve (S2) to

illustrate the effect of speculation.

P1

P2

P

Q O

P3

S1

S2

D1

D2

a

b

D3

c

Destabilising speculation: initial price fall

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008*0

2

4

6

8

10

12

14

Mortgage Advances forBuy-to-let Properties

Source: Council of Mortgage Lenders * projected

Advances in period

(£m)% of total

advances

Causes of rising house prices

• Shifts in demand: long-term causes

– Population growth

• Immigration and emigration

– Population distribution

• Family size

• Regional trends

• Income distribution

Causes of rising house prices

• Shifts in supply: short-term causes– Speculation

– Rents (letting property isa substitute)

• Shifts in supply: long-term causes– House building

• Costs• Availability of land• Planning regulations

What will happen to House Prices?

Is there going to be a crash?

Link

What will happen to house prices?

• Short-term: probably fall sharply– Credit crunch– Buy-to-let is now much less profitable

• In many cases rents do not cover the mortgage interest

– Renting is now relatively more affordable– Speculation– Interest rates: actual and expected

• Problem of inflation: B of E reluctant to reduce rate

– Flats fall more than houses

Source: based on Halifax House Price Index (HBOS)

Inflation rates for (a) flats and(b) semi-detached houses

(a)(b)

* projected

What will happen to house prices?

• Short-term: probably fall– Credit crunch– Buy-to-let is now much less profitable– Renting is now relatively more affordable– Speculation– Interest rates: actual and expected– Flats fall more than houses– North fall more than the south

Source: based on Halifax House Price Index (HBOS)

Quarterly inflation rates for (a) the north and(b) the south east

(a)

(b)

What will happen to house prices?

• Short-term: probably fall– Credit crunch– Buy-to-let is now much less profitable– Renting is now relatively more affordable– Speculation– Interest rates: actual and expected– Flats fall more than houses– North fall more than the south

• Long-term: probably rise– Demand will probably outstrip supply

What can the government do?

• Demand– Making house ownership more

affordable• Tax relief• Schemes for mortgage sharing

– But ultimately increases demand

• Supply

What can the government do?

• Demand– Making house ownership more

affordable• Tax relief• Schemes for mortgage sharing

– But ultimately increases demand

• Supply– Relaxing planning regulations– Public housing

Housing as a barometer of the economy• Demand reflects incomes

– Recession causes lack of demand• People cannot afford to move• People less likely to move to other locations

– Exaggerated effect• Interest rates

– Depend on inflation– Reflect credit conditions– Affect the housing market

• Housing market reflects confidence– Demand– House building

• Housing market affects other markets– DIY, furniture, repairs, etc.