UK is one of the most developed economy in the world that has faced large amount of immigration over the time since industrialization. With the higher amount of growth depending upon the colonization economy, the country has become where it is now. According to the Favell (2016), UK is one of the nations that faces highest amount of immigration and it has made the housing sector to grow to a large extent. With ever rising number of the population in the country, UK has effectively truncated various economic factors in order to provide its economy a sustainable growth. One of the most prominent sector that has faced largest amount of growth since the country started to cannonballing its growth rate is the housing sector (Boquet 2017). However, since the last decade it has been observed that there has been various fluctuations in the housing sector in the economy. This report is meant to analyze various factors that has contributed substantially to determine the price of the houses in the economy. In addition to this, it will portray how the housing policies from the UK government has affected the housing sector.
Factors that determine the price of houses from 2006 to 2016:
UK being one of the developed nations always used to face high amount of immigrants and the multifaceted factors faced by the UK economy, various researches has argued that there were various factors that caused the fluctuation in the housing sector of UK during the 2006 to 2016. According to the researchers like Wilcox (2014), 2006 to 2016 can be considered as one of the best time for the UK housing society that caused both the highest growth and highest fall in the UK housing sector over the last five decades. Various factors that aided to determination of the UK housing prices from the given time period are as follows:
Gross Domestic Product or GDP is one of the main factors that leads to fluctuation in the economic parameters (Schneider 2018). If there is rise in the GDP, then it portray that the overall production of the country has enhanced and the national income has also enhanced leading the country to a better position (Dhingra et al. 2016). With better GDP growth rate, citizens of the nation will have higher disposable income that will aid them to afford new houses.
GDP growth rate of the UK, where it can be seen that during 2006, the country was growing with a growth rate higher that 2% annually and by the end of 2016, the growth rate has fallen lower than the initial growth rate (Nationwide.co.uk 2018). In addition to this, there were highest drop in GDP growth rate of the country during 2009, owing to the Global Financial Crisis. With government intervention and reformation programs, UK growth rate slithered back to a sustainable situation during 2014 however soon it started to fall. Thus it can be stated that GDP growth is an important factor that determine the housing price in UK.
This is another macroeconomic variable that leads to alteration in the housing sector. According to the Hirsch (2015), if there is rise in the disposable income, then it will aid the citizens to afford new houses and on the other hand if there is lack of disposable income, then it will lead to fall in the demand in the housing sector.
Now considering the unemployment rate in the UK market, it can be seen that substantial amount of fluctuation was there over the 2006 to 2016 (Ellison and Dwyer 2016). During 2011, unemployment rate was highest in the country according to the figure 2 and it started to fell from the next year on (Ons.gov.uk 2018). During 2008, unemployment rate was highest in the country due to the inflation in the market. According to the Tsai and Tsai (2018), this fluctuation in the unemployment rate has caused alteration in the country’s housing sector and the slight high rate of unemployment from natural unemployment rate has caused fall in the market demand leading to fall in the price of the new houses.
According to the figure 3, it can be said that UK housing price to earnings ratio has remained moderate over the period and it slightly increased since 2014. The above figure highlights that London has the highest price to earnings ratio and the North has the lowest leading to overall country’s earning to price ratio intact over the time. With better price to earnings ratio, buyers will be able to buy more easily and considering this it can be stated that the people from London has been provided the highest potential to buy new houses in the country and the North has lowest among the selected region of the country (Milan et al. 2017).
Confidence of the buyers’ is one of the essential triggers that determines the prices of houses in the UK. With higher confidence of the buyers on the market dynamics, demand will also rise and in case of lower confidence demand of the houses will fall. Now, the price fluctuation of the houses is the deciding factor that determine the confidence on the market (Dettling and Kearney 2014). Higher fluctuation in the prices often tends to the lower confidence in the market and lower fluctuation of price on the other hand leads to enhanced stability as well as the higher buyer’s confidence.
From the figure 4, it can be seen that there were high fluctuation in the UK housing market within the chosen time frame. During 2006, housing prices of the UK was rising and due to recession in the global economy it started to fall and reached lowest point during 2008 to 2009 (Ons.gov.uk 2018). Post-recession period housing prices raised to a moderate level and since then there were various ups and downs in the UK housing market (Gurran and Bramley 2017). Thus, from the real scenario of the UK housing prices, it can be inferred that the fluctuation in the housing prices has led to fall in the buyer’s confidence and subsequently the price of the UK housing has fallen too.
Affordability index is the measurement of the median household income compared to the income required to buy a median priced house (Bourassa and Haurin 2016). Higher affordability index indicated better affordability of the houses and vis-à-vis.
Considering the figure 5, it can be seen that affordability index of the UK housing sector has faced various fluctuation over the time. Affordability was highest during 2007, where the high demand caused fall in the price and since then due to outrageous recession in the economy, affordability fell to an alarming rate (Ganning 2017). Considering the trend it can be seen that the affordability index is falling again and it has christened through another recession in the UK.
Prevailing market interest rate:
Higher interest rate in market leads to lower loanable demand (Blanchard et al. 2014). With lower demand of the loans, there will be substantial amount fall in the demand of the houses that can provide a dampening blow to the UK housing market.
From the figure 6, it can be seen that the interest rate in UK market has fell substantially from 2006 to 2011 and since then it has been rising. Considering this it can be inferred that lower interest rate has a posed a positive effect on the UK housing market (Agenor and Montiel 2015). However, lack of incentive to purchase new homes as well as crowding out effect of the UK housing policies by the government has made it inefficient to woo the market.
This is the vital factor that determines the housing prices in all the economies. Higher demand will influence the price of the UK housing sector and on the other hand lowered demand will lead to fall in the price. Combining these two it can be seen that if there is rise in the demand for the houses in the UK, then it will provide stimuli to the housing sector and vis-à-vis.
From the figure 7, it can be seen that dwelling in the UK has been rising since 2006 and it faced a large reduction in the number of immigrants due to global recession during 2009. Post-recession, dwelling has enhanced till 2013, after that it fell again with a quick rise in the dwelling number again. Thus from figure 7, it can be seen that the dwelling has enhanced and according to the Tsai (2015), there is a positive relation between the rise in demand of the houses and price. Thus prices can highly be influenced by the effective demand in the market for the houses.
Figure 8, portrays the clear image of the UK housing sector, where there has been magnanimous amount of fluctuation in the market during 2006 to 2016. With rise in inflation both the demand of the first time buyer and former owner of the housed in UK has fell during 2009 and again it enhanced to a substantial amount since then (Munro 2018). Next to this, demand started to fall again since 2010 and it rose during 2014 with certain fluctuations. Comparing the figure 7 and 8, it can be seen that due to change in demand there has been alteration in the housing prices.
Impact of UK governmental scheme in housing market:
UK has faced large amount of growth in its housing sector over the time and it has aided the economy to have better growth prospect. However, according to the Gibbs and O’Neill (2015), recent slug in the housing sector has caused the government to introduce various economic programs that can essentially woo the market. However, how these schemes has performed is under scanner from the various researchers.
It was introduced for the citizen of the UK who are 40 years older and doesn’t have own houses. The subsidized houses were available at a discounted price of 250, 00€ and it aided to enhance the demand of the houses for the citizen who earns more than 41,000€ annually (Ons.gov.uk 2018).
This schemes was introduced for the families who earn less than 80,000€ annually (Nationwide.co.uk 2018). To achieve the benefit of the scheme, buyers has to mortgage valuables to the government to secure the government lending. This scheme was aimed to enhance the loanable income for the government, however, it increased the interest rate and the buyers became skeptic to afford this.
This is one of the best housing scheme from the government in true sense. It was subdivided into two forms, which were mortgage guarantee scheme and the Equity Loan Scheme. This scheme is aimed to help the buyers who are willing to have homes for the first time that cost more than 600,000€ (Pwc.co.uk 2018). According to the same source, government in such case will provide 20% of the price and 40% in case the house is located in London (Ons.gov.uk 2018). With reduced price this scheme was meant to woo the demand of the houses that can effectively provide benefit to the ailing housing market of the country.
According to the governmental statistics, 365,000 new houses were sold during 2017 and from the comparative analysis it can be seen that the number of first time house buyers has enhanced by 7.4% from the 2016 figure (Nationwide.co.uk 2018). From the above mentioned details regarding the various housing schemes by the government, it can be seen that it has performed well during the initial days that forced the demand of the houses to increase through reduction in the housing prices. However, soon, the lowered price has lead the demand to rise enormously as can be seen from the figure 8. According to the Office for National Statistics inflation in housing price was as high as 5.2% that portrays sudden rise in the demand of the houses in the country due to governmental schemes (Ons.gov.uk 2018). This sudden rise in the demand crowded out the positive effect of the governmental schemes ultimately leading to the fall in demand of the houses in the economy as portrayed by the figure 5.
From the above analysis it can be seen that there has been various factors that has led to fluctuation in the economy of the country as well as in the housing sector too. The analysis has found that the main factors that has driven the price of housing sector are the demand pull, GDP growth rate, interest rate, buyer’s confidence and the affordability of the houses. Now, when it comes to the impact of the UK governmental scheme for houses, then it can be seen that the schemes has been beneficial during the initial days. However, over the time enhanced demand led by the reduced price has caused crowding out of the positive effect of the schemes. Thus to conclude the analysis it can be stated that the housing sector of the UK has faced various fluctuation over the time and though there has been governmental schemes to gauge the situation, they have failed to provide required stimuli to the market. Though welfare of the UK population has enhanced to some extent, however desired outcome hasn’t been achieved.
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