Describe about the Business Economics For Uk Housing Market?
The important role in the economy of the UK is played by the housing market. The influence that the housing market has on the economic growth, financial stability and the transmission mechanism of the monetary policy is inevitable. The purchase of the house in any country involves a large portion of the household income which draws the importance of the housing market in the lives of the people. One of the striking characteristic of the housing market in the economy of the UK is its volatility. During the last two decades, the UK economy had witnessed two crucial booms and busts in the housing market. (Ons.gov.uk, 2015)
Mark Carney who is the governor of the Bank of England has exhibited concern relating to the housing market and the recent boom that it experienced in an interview at the Sky’s Murnaghan Show. The biggest threat that the UK economy is about to face is the huge expansion in the UK housing market. This can restrict the recovery of the UK economy. The main reason behind the hike in the price of the houses is the shortage of houses in the country. This can be handled if the banks become conscious when they sanction loans and mortgages to the individuals and make sure that they are in a position to repay them back. (E-Residentials | Online Estate Agent, 2014)
Reasons For Changes In The Housing Market:
There are numerous factors that influence the price of the housing market. Some of the reasons are discussed below: (Pettinger, 2011)
Economic Growth- the commodity house is characterized by positive elasticity of income. This implies that as the income of the individuals increase, there is a rise in the purchasing power enabling them to purchase houses. The Economy of UK has witnessed GDP growth in the third quarter of 2014 which ranked the country as the fastest growing G7 economy in spite of the economic slowdown. . (Allen, 2014)
The chart reveals that over the two years there has been growth in the GDP which ensures that people now have increased income and are able to purchase houses. The demand for houses thus increased causing a situation of excess demand in the housing market which raised its price. Money, 2013)
Unemployment- since the economy of the UK has depicted GDP growth over the years, then it is quite obvious that the rate of unemployment have declined and the employment increased in the country to 73%. This again implies people with increased income, driving the demand for the house and thus increasing the price of the houses. (Monaghan and Inman, 2014)
We can see that there is a steep decline in the unemployment rate in the UK from January 2014 to January 2015 except for few months when the rate was stable at 6%. This implies that income increased and an excess demand for houses hiked the prices.
Rate of Interest- the rate of interest were believed to be stable throughout year 2014 at about 0.5% which is regarded to be quite low. This gave the consumer confidence regarding their mortgage payments as the low interest rate lessened the mortgage payments. . (BBC News, 2014)
This stable interest rate in the economy of the UK enables the citizens to buy houses and raise the demand for the houses and thereby increasing the price of the houses.
Consumer Confidence- the consumer confidence regarding the purchase of the houses depends on the expectation of the rise or fall in the price of the house.
Availability of mortgages- there was an increase in the availability of the mortgage loans. The low deposit norms of the banks enabled the rise of the mortgage loans according to the BoE. This increased the house demand and thus increasing in the price. (The Guardian, 2014)
Supply- there is always a shortage of houses in the UK. The ever increasing population of the country increased the demand for houses but the availability of the houses could not satisfy the demand creating a situation of excess demand in the economy which drives up the prices. . (Inman, 2015)
Factors That Affect The Price:
The main factors that affect the price of the houses is the demand and supply mechanism of the housing market.
From the diagram we can see that as the demand for houses increased there is a situation of excess demand in the economy which will eventually raise the price of the house.
But the determinants of the demand and supply are influenced by the macroeconomic and microeconomic factors. Let us analyze the macro and micro factors which affect the pricing of the houses. (Tan, 2015) (Ft.com, 2015)
1. Population Growth- As the population of the country increased over the years, the housing market feels the pressure and the shortage of houses along with the increased population aggravate the rise in the price of the houses. The Malthusian theory states that the population increases at a geometric rate and a small change in the population would not enable the new entrants to accommodate houses in the economy.
It can be seen that over the years there has been substantial growth in the population in the UK which increased the demand for houses and thus increased the prices. (Indexmundi.com, 2015)
2. Employment and wage growth- as the employment in the UK increased, the rate of increase in wage also increased which gave the consumers the confidence to demand and purchase new houses. This causes a situation of excess demand which finally raised the price of the houses. (Galor and Weil, 2000)
3. Financing properties- the banks and the policies taken by the government relaxed the facilities for acquiring the mortgage and loans in the market. This enabled the individuals to have smooth access to the mortgage and loans. Thus the approvals to the mortgage increased and gave the individuals the power to purchase houses thereby increasing the price.
4. Land scarcity- the population growth always exerted pressure on the housing market. This created a pressure on the land availability. With the increase in the population, the land resource became scarce which caused excess demand and drove the price up. (McGrath, 2014)
5. Exchange rate- the depreciation in the exchange rate caused the foreign buyers of houses to face an increased price and appreciation of the domestic caused the opposite and lowered the price.
1. Location and amenities- the availability and the access of the highways, roads, railways, shopping malls, hospitals, school increase the intrinsic value of the houses. This causes the prices of the houses to increase. A proper analysis of the location of the house can well influence the price of the houses. If the house is located in a not so attractive area then the buyer would not agree to render high price for the house.
2. Government planning- government formulates policies and plans for the improvement of certain areas which enhances the values of the houses. This can influence or raise the price of the houses.
3. Building style- the architectural styles of a particular house increases the value of the houses. A good structured and design of the houses can raise the price of the houses.
4. Tastes and preferences- the preference of the individuals to purchase a house in the countryside or under the mountains or near a river can raise the price of the houses in those locations.
Thus we see that the macro and the micro factors influence the pricing decisions of the housing market. But the relevance of the macroeconomic factor is important in this regard and the influence of the microeconomic factors cannot be ignored.
The major challenges of the housing market are the shortage of houses in the UK. The demand and supply of the houses influence the prices of a house. The increased demand for houses due to the GDP growth, Population Growth, unemployment rate reduction causes a situation of excess demand which raises the price of the market. Thus it is necessary for the government ot take actions against the rise in the price of the housing market. (Economicsonline.co.uk, 2015) (UK Parliament, 2015)
The report suggests the concern of the governor of the BoE Mark Carney about the downfall of the economy due to the booming housing market in the UK. The rise in the price is mainly due to the shortage of houses in the country as a result of increased population. Measures should be taken by the government to increase the supply of houses to the house builders who will get the incentive to build houses. This will drive out the shortage of supply houses in the UK restoring the economic situation of the country. in this regard the macroeconomics factors play a crucial role in stabilizing the prices of the housing market. (Galati, Teppa and Alessie, n.d.) (White, 2014)
All sources of the charts are taken from www.tradingeconomics.com
Allen, K. (2014). 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 21 Feb. 2015].
BBC News, (2014). Rates 'to stay at 0.5% this year'. [online] Available at: https://www.bbc.com/news/business-25561477 [Accessed 21 Feb. 2015].
Economicsonline.co.uk, (2015). UK house prices. [online] Available at: https://www.economicsonline.co.uk/Competitive_markets/House_prices.html [Accessed 21 Feb. 2015].
E-Residentials | Online Estate Agent, (2014). E-Residentials | Online Estate Agent. [online] Available at: https://www.e-residentials.co.uk/#!Mark-Carney-House-Prices-Biggest-Risk-To-Economy-/cky5/6B899536-9302-452E-AB1E-FDCEF3931DAF [Accessed 21 Feb. 2015].
Ft.com, (2015). UK house prices: In depth news, commentary and analysis from theFinancial Times. [online] Available at: https://www.ft.com/indepth/uk-house-prices [Accessed 21 Feb. 2015].
Galati, G., Teppa, F. and Alessie, R. (n.d.). Macro and Micro Drivers of House Price Dynamics: An Application to Dutch Data. SSRN Journal.
Galor, O. and Weil, D. (2000). Population, Technology, and Growth: From Malthusian Stagnation to the Demographic Transition and Beyond. American Economic Review, 90(4), pp.806-828.
Indexmundi.com, (2015). United Kingdom Population growth rate - Demographics. [online] Available at: https://www.indexmundi.com/united_kingdom/population_growth_rate.html [Accessed 21 Feb. 2015].
Inman, P. (2015). Mark Carney: rising house prices pose biggest risk to recovery. The Guardian. [online] Available at: https://www.theguardian.com/business/2014/may/18/mark-carney-house-prices-risk-economy-bank-of-england [Accessed 21 Feb. 2015].
McGrath, M. (2014). UK faces 'significant' land shortage. [online] BBC News. Available at: https://www.bbc.com/news/science-environment-28003435 [Accessed 21 Feb. 2015].
Monaghan, A. and Inman, P. (2014). UK unemployment falls below 2 million for first time since financial crisis. The Guardian. [online] Available at: https://www.theguardian.com/business/2014/oct/15/uk-unemployment-falls-6-percent-lowest-lehman-brothers [Accessed 21 Feb. 2015].
Ons.gov.uk, (2015). House Price Index, December 2014 - ONS. [online] Available at: https://www.ons.gov.uk/ons/rel/hpi/house-price-index/december-2014/stb-december-2014.html [Accessed 21 Feb. 2015].
Pettinger, T. (2011). Factors that affect the housing market | Economics Help. [online] Economicshelp.org. Available at: https://www.economicshelp.org/blog/377/housing/factors-that-affect-the-housing-market/ [Accessed 21 Feb. 2015].
Positive Money, (2013). House prices: why are they so high? | Positive Money. [online] Available at: https://www.positivemoney.org/issues/house-prices/ [Accessed 21 Feb. 2015].
Tan, A. (2015). Macro And Micro Factors That Make The Property Market Tick | Propertylogy. [online] Propertylogy.com. Available at: https://www.propertylogy.com/knowledge/macro-and-micro-factors-that-make-the-property-market-tick/ [Accessed 21 Feb. 2015].
The Guardian, (2014). Mortgage price war expected as UK lenders fight for market share. [online] Available at: https://www.theguardian.com/money/2014/oct/07/mortgage-price-war-uk-lenders-market-share [Accessed 21 Feb. 2015].
UK Parliament, (2015). Housing supply and demand. [online] Available at: https://www.parliament.uk/business/publications/research/key-issues-for-the-new-parliament/social-reform/housing-supply-and-demand/ [Accessed 21 Feb. 2015].
White, A. (2014). Nationwide: House prices rise but so do mortgage rejections. The Telegraph. [online] Available at: https://www.telegraph.co.uk/finance/property/house-prices/11197402/Nationwide-House-prices-rise-but-so-do-mortgage-rejections.html [Accessed 21 Feb. 2015].