The UK Housing MarketIs it actually working?

The UK Housing MarketIs it actually working?

AS AQA Edexcel OCR

1 Markets and market failure Markets – how they work The market system

2 The national economy Markets – why they fail Market failure and government intervention

3 Markets at work Managing the economy The national and international economy

A2 AQA Edexcel OCR

1 Working as an economist Industrial economics

2 Business economics and the distribution of income

a. Labour economics: or b. Development economics

Two from a. Economics of work

and leisure b. Transport economics c. Economics of

Development d. The UK economy

3 Government policy, the national and international economies

The UK in the global economy

Economics in a European context

Source: based on Halifax House Price Index (HBOS)

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

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

-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

Source: based on Halifax House Price Index (HBOS)

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

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

-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

Source: based on Halifax House Price Index (HBOS)

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

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

-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

-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

Source: based on Halifax House Price Index (HBOS)

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

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

Who benefit from rising house prices?Who benefit from rising house prices?

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

• The gainers

– The first-time buyer– Those upscaling

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

• Those largely unaffected

– Downsizers– Elderly going into homes– Emigrants

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

where house prices are similar

– Those not moving– Those moving to another area

where house prices are similar

Causes of rising house pricesCauses of rising 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

• 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 supplySupply curves with different price elasticity of supply

P

Q O

P0

Q0

S1

S2

D0

D1

Q2 Q1

P2

P1

Causes of rising house pricesCauses of rising 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

• 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

– 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 pricesCauses of rising house prices

• Shifts in demand: short-term causes– Incomes

• Current and expected

– Interest rates• Current and expected

• Shifts in demand: short-term causes– Incomes

• Current and expected

– Interest rates• Current and expected

Halifax variable mortgage rateHalifax variable mortgage rate

Causes of rising house pricesCauses 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

• 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

£000s

Source: based on Halifax House Price Index (HBOS)

Ratio of average house prices to average earningsRatio of average house prices to average earnings

£000s

Source: based on Halifax House Price Index (HBOS)

Ratio of average house prices to average earningsRatio of average house prices to average earnings

£000s

Ratio of average house prices to average earningsRatio of average house prices to average earnings

Source: based on Halifax House Price Index (HBOS)

£000s

Ratio of average house prices to average earningsRatio of average house prices to average earnings

Source: based on Halifax House Price Index (HBOS)

Causes of rising house pricesCauses 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

• 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

– Rents (rental property is a substitute good)

– Taxation: stamp duty

– Speculation about future house prices

– 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 riseSpeculation 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 effects of these shifts is a price rise to P3

Speculation compounding a price riseSpeculation compounding a price rise

0

5000

10000

15000

20000

25000

30000

35000

40000

1999 2000 2001 2002 2003 2004 2005 2006

Mortgage Advances for Buy-to-let PropertiesMortgage Advances for Buy-to-let Properties

Causes of rising house pricesCauses of rising house prices

• Shifts in demand: long-term causes

– Population growth

– Population distribution

• Family size

• Regional trends

• Income distribution

• Shifts in demand: long-term causes

– Population growth

– Population distribution

• Family size

• Regional trends

• Income distribution

Causes of rising house pricesCauses of rising house prices

• Shifts in supply: short-term causes

– Speculation

– Rents (letting property isa substitute)

• Shifts in supply: long-term causes

• 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

– House building• Costs

• Availability of land

• Planning regulations

What will happen to House Prices?

Is there going to be a crash?

What will happen to House Prices?

Is there going to be a crash?

What will happen to house prices?What will happen to house prices?

• Short-term: probably fall

– 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

– Flats fall more than houses

• Short-term: probably fall

– 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

– Flats fall more than houses

Source: based on Halifax House Price Index (HBOS)

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

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

(a)(b)

What will happen to house prices?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

• 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

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

(a)

(b)

What will happen to house prices?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

• 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?What can the government do?

• Demand

– Making house ownership more affordable

• Tax relief

• Demand

– Making house ownership more affordable

• Tax relief

• Schemes for mortgage sharing

– But ultimately increases demand

• Supply

• Schemes for mortgage sharing

– But ultimately increases demand

• Supply

What can the government do?What can the government do?

• Demand

– Making house ownership more affordable

• Tax relief

• Demand

– Making house ownership more affordable

• Tax relief

• Schemes for mortgage sharing

– But ultimately increases demand

• Supply

• Schemes for mortgage sharing

– But ultimately increases demand

• Supply

– Relaxing planning regulations

– Public housing

– Relaxing planning regulations

– Public housing

You can find these PowerPoint slides on

www.economicsnetwork.ac.uk

/archive/A-level_Dec07

You can find these PowerPoint slides on

www.economicsnetwork.ac.uk

/archive/A-level_Dec07