the uk housing market is it actually working? the uk housing market is it actually working?

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The UK Housing Market Is it actually working? The UK Housing Market Is it actually working? Slide 2 Slide 3 Source: based on Halifax House Price Index (HBOS) UK house price inflation (annual percentage rates, adjusted quarterly) Slide 4 Source: based on Halifax House Price Index (HBOS) UK house price inflation (annual percentage rates, adjusted quarterly) Slide 5 Source: based on Halifax House Price Index (HBOS) UK house price inflation (annual percentage rates, adjusted quarterly) Slide 6 Source: based on Halifax House Price Index (HBOS) UK house price inflation (annual percentage rates, adjusted quarterly) Slide 7 Who benefit from rising house prices? 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 Slide 8 Causes 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 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 Problem of inelasticity of supply Slide 9 Supply curves with different price elasticity of supply P Q O P0P0 Q0Q0 S1S1 S2S2 D0D0 D1D1 Q2Q2 Q1Q1 P2P2 P1P1 Slide 10 Causes 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 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 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 Slide 11 Causes 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 Slide 12 Halifax variable mortgage rate Slide 13 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 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 Slide 14 000s Source: based on Halifax House Price Index (HBOS) Ratio of average house prices to average earnings Slide 15 000s Source: based on Halifax House Price Index (HBOS) Ratio of average house prices to average earnings Slide 16 000s Ratio of average house prices to average earnings Source: based on Halifax House Price Index (HBOS) Slide 17 000s Ratio of average house prices to average earnings Source: based on Halifax House Price Index (HBOS) Slide 18 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 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 Slide 19 P1P1 P Q O S1S1 D1D1 D2D2 a P2P2 b Speculation compounding a price rise People believe that the rise in price to P 2 signifies a trend. Assume an initial rise in demand Slide 20 P1P1 P2P2 P Q O P3P3 S1S1 S2S2 D1D1 D2D2 a b D3D3 c The rise in price to P 2 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 P 3 Speculation compounding a price rise Slide 21 Mortgage Advances for Buy-to-let Properties Slide 22 Causes 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 Slide 23 Causes of rising house prices Shifts in supply: short-term causes Speculation Rents (letting property is a substitute) Shifts in supply: long-term causes Shifts in supply: short-term causes Speculation Rents (letting property is a substitute) Shifts in supply: long-term causes House building Costs Availability of land Planning regulations House building Costs Availability of land Planning regulations Slide 24 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? Slide 25 Slide 26 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 Slide 27 Source: based on Halifax House Price Index (HBOS) Inflation rates for (a) flats and (b) semi-detached houses (a) (b) Slide 28 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 Slide 29 Source: based on Halifax House Price Index (HBOS) Quarterly inflation rates for (a) the north and (b) the south east (a) (b) Slide 30 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 Slide 31 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 Slide 32 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 Slide 33 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

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