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SBLC4004 Economics For Business0

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  • Course Code: SBLC4004
  • University: University Of Wales Trinity Saint David
  • Country: United Kingdom

Question:

Explore the economic issues and challenges facing individuals and firms and understand how resources are allocated in a mixed economy and a command economy

Apply the concepts of elasticity, price, consumer behaviour and utility maximisation to analyse economic issues and problems

Understand market structures and firms’ decisions to supply goods in the context of profit maximisation and gain a strong foundation for a practical problem-solving approach by using the technique of economic analysis

Explore market inefficiencies, social costs and benefits and gain a strong foundation for a practical problem-solving approach by using the technique of economic analysis.

 

Answer:

Introduction 

One of the most developed countries in the contemporary global economic scenario, which has over decades shown impressive growth traits in almost all the aspects, is the United Kingdom. Being one of the largest economies under the European Union as well as in the global framework, the economy ranks among the top ten countries in the world, both in terms of Nominal GDP as well as in terms of purchasing power parity (Fethi and Katircioglu 2015).

Much of the economic growth of the country can be attributed to the robust development of different sectors in the economy, especially the industrial as well as the service sectors in the economy. The country has also established robust trade and business relations with almost all the economies in Asia, Europe and across the world and has witnessed immense immigrations from different parts of the world, owing to global economic phenomena like Globalization, liberalization and transfer of production activities as well as productive resources across the globe.

These factors have cumulatively contributed to an increase in the demand for residential assets in the country, which in turn has led to immense development of the residential sector of the country (Derudder 2012). However, the housing sector of the country has been subjected to considerable dynamics owing to different domestic as well as international phenomena, the fluctuations being in terms of prices, affordability as well as availability. Keeping this into account, the concerned report tries to discuss the different fluctuations and trends prevailing in the residential industry of United Kingdom, especially within 2006-2016, thereby trying to analyse the causes behind such fluctuations in the same. In the last part, the report highlights the policies and strategies taken by the governing authorities of the country to bring stability and welfare maximization in this sector by facilitating investment, demand, supply as well as affordability.

 

Residential Sector of UK 

As can be seen from the above discussion, the economic prosperity and employment and business scopes in the country over the years have led to the growth of the residential sector in the country considerably, which in turn also acts as one of the primary contributors in the Gross Domestic Product of the country. The trend of increase in the demand supply dynamics in this sector of the country has increased in the contemporary period with the increasing notion of viewing the residential places not just as places to dwell but also as alternative and lucrative form of investments (Wilcox and Perry 2014). This has led to the increase in the importance of the housing sectors of the countries in the world as a whole and specifically of that of the United Kingdom.

Figure 1: Contribution of Housing sector in the growth of productivity of UK (2014)

(Source: Gov.uk 2018)

As can be seen from the above figure, the residential sector of the country has emerged as one of the primary factors contributing to the production and economic growth of the country with time. However, the housing sector has shown significant fluctuations in terms of prices, supply and affordability, which is discussed in the following section of the concerned report.

Fluctuations in the housing sector of UK 

There have been significant fluctuations in the housing market of the country over time. This can be seen both in terms of availability as well as in terms of price levels prevailing in the market.

Figure 2: Dynamics in the number of net additional dwellings in the UK over the years

(Source: Dailymail.co.uk 2018)

From the above figure, it is evident that the number of net housings in UK consistently increased till 2007-2008, before experiencing a huge slump post 2008, the slump continuing till 2011. Apart from the number of additional dwellings in the country, added per year, there has been fluctuations in the price levels of these assets as well, which is measured with the help of the House Price Index of the country (Oxley and Smith 2012). This measure shows the dynamics in the single-family house prices in an economy with time, with an increase in the index implying rise in the house prices as a whole and vice versa.

Figure 3: UK House Price Index (2006-2016)

(Source: Tradingeconomics.com 2018)

The house price index also is seen to be considerably high before 2008, followed by a massive decline post 2008, which continued for a prolonged period. Only after 2013-2014, the HPI of the country is seen to be climbing consistently upwards, thereby indicating towards a recent increase in the house prices again in the contemporary period.

 


These dynamics in the additional number of dwellings in the economy of the country can be linked to the causes, occurrences as well as aftermath of the Global Financial Crisis of 2008, which originated as a sub-prime mortgage crisis in the USA and affected almost all the economies across the world, leading to burst of the investment bubbles in different sectors of the economies (Shiller 2012). In case of the United Kingdom, the crisis arose from the bursting of the investment bubble in the residential sector primarily.

Thus, the fluctuations and dynamics occurring in the residential sector of the country, between 2006 and 2016 can be roughly divided into the following sub-periods, depending upon the characteristics of the periods and their implications on the price and availability scenarios in the housing sector of the country:

  • Considerable fluctuations in the price levels (2006-2010)
  • Relative decline and stagnation in the price levels (2010-2012)
  • Rise in the levels of price of the houses (post 2012)

The factors working behind the dynamics in the price levels in these sub-periods are discussed in the following section of the report.

Factors affecting the prices in the housing market of UK 

The fluctuations in the housing market prices of the United Kingdom can be attributed to the different endogenous factors working within the system as well as on different exogenous factors which had considerable implications on the demand and supply dynamics, the buying patterns as well as on the pricing mechanism in the market. These factors according to the three sub-periods are discussed as follows:

Period before the Global Financial Crisis of 2007-2008 

In this period, the demand as well as supply of the housings were both increasing considerably, thereby having an upward pressure on the price levels of the housing assets. The primary factors behind this increasing boom in the housing market of the United Kingdom can be discussed as follows:

1) Economic development- Before the crisis period of 2007-2008, the United Kingdom was showing considerable economic growth due to increasing prosperity and expansion of the industrial sectors of the country.

 

Figure 4: GDP Growth of the United Kingdom (2000-2006)

(Source: Tradingeconomics.com 2018)

As is evident from the above figure, the stable growth of the GDP led to significant increase in the income abundance as well as standard of living of the residents of UK. Also, this increase in the economic prospects of the country attracted significant number of immigrants from all parts of the world (Montgomerie and Büdenbender 2015). Together these factors contributed in the increase in demand for the residential properties in the country.

 

2) Attractiveness of housing assets- With the increase in the economic prosperity and constant infiltration of people from all parts of the world, the demand of housings increased, which in turn increased the attractiveness of these assets as an alternative and reliable form of investments with consistent high returns. People, both investors as well as households, started investing in these assets in the perception that the prices of such assets would only go up. The financial institutions also facilitated the same by increasing their lending (like that of zero mortgage ones or low interest ones) which enabled the investors to indulge more into risky investment activities, which in turn forced the prices upwards (Ngai and Tenreyro 2014).

3) Demand increasing more than supply- The supply of housings also increased during this period of time, however, the same could not match up with the increase in the demand, which in turn increased the prices of housings further.

 

Figure 6: Increase in price of housings due to more than proportionate increase in demand

(Source: Created by the author)

The housing assets thus became more attractive in this period, thereby attracting more and more investments, which in turn led to the creation of an investment bubble in the economy.

Crisis Period of 2008 

The housing investment bubble created in the economy of UK burst in 2008, following the Global Financial Crisis, which led to an acute mortgage crisis. The effects of the crisis percolated to all parts of the economy leading to immense credit crunches, loss of productivity, recession and high unemployment in the economy, which led to a substantial fall in the demand as well as prices in the housing sector of the country. The factors and their implications on housing sector are as follows:

  1. a) Unemployment-The initiation of acute recessionary situation in the country led to a huge increase in the level of unemployment which can be seen as follows:

Figure 7: Increase in unemployment post 2008

(Source: Tradingeconomics.com 2018)

The huge increase in the unemployment post 2008 decreased the demand for housing assets which had already lost their attractiveness due to withdrawal of investments. The House Price Index came down significantly during this period and stayed low till 2013.

2) Withdrawal of investments- The burst of the housing bubbles also led to significant rise of scepticism regarding investments in the residential sector of the country, which in turn led to immense withdrawal of investments, both nationally as well as in terms of withdrawal of the FDI, thereby reducing the demand for the housing properties, the effects of which can be seen on the market as follows:

 

Figure 8: Fall in prices due to fall in demand and withdrawal of residential investments

(Source: Created by the author)

The prices, in the presence of a significant decrease in the demand, fell considerably, which can be seen from the falling HPI of the country during that time. However, this recessionary situation was overcome by the country eventually, owing to the robust policy and restoring measures taken by the governing authorities of the country (Fingleton, Garretsen and Martin 2012).

 

Period post recovery (2012-2016) 

The house prices are seen to be increasing once the effects of recession withered away, which can be seen from the increasing HPI again. The factors affecting the same can be seen as follows:

1) Inflation- In the current period, the economy of the country has been experiencing an increasing inflationary pressure which can be attributed to the increasing in the employment and aggregate demand in the country.

 

Figure 9: Inflation rate of UK over the years

(Source: Tradingeconomics.com 2018)

This has resulted in an upward pressure in the price levels of the housing assets.

2) Declining real wage rate- The inflation hike has led to the decrease in the purchasing power thereby leading to a decline in the real wage growth of the country, which in turn has led to an increase in the ration of house price relative to the real wages of the residents of the country, as can be seen from the following figure:

Figure 10: Increase in the ratio of housing price and real wage in UK

(Source: Pwc.co.uk 2018)

This in turn has led to an increase in the relative price of the housings, which has created considerable affordability issues in the residential market of the country (Bell and Blanchflower 2013).

3) Supplier’s Strategies- To increase the prices of the housing assets, the producers also engage in constricting the supply of housing. Part of this deliberated restriction of supply of housing can also be attributed to the increase in scepticism on part of the suppliers especially after the recessionary periods, which increased even more after the announcement of Brexit. This has led to even more increase in prices of housings, thereby leading to an increase in the affordability issues.

Government policies and measures 

To address this rising issue of affordability in the residential sector of the country, the government has concentrated on framing different strategies and aids in order to help especially those residents for whom buying a house altogether is a costly affair. The problem is actually more acute for the young age population in the country and the potential first time buyers in the residential sectors of the country.

Figure 11: Decline in the number of first time buyers in UK

(Source: Collinson 2018)

Keeping this into consideration, the government of the country has introduced several schemes, the primary ones are as follows:

Shared Ownership- Under this scheme, the residents are entitled for the facility of paying only a share of the total price of the house (may range from 25% to 75%) at once and then can pay rent for the rest.

Help to Buy- This scheme enables the buyers to borrow a percentage (20%) of the price of the house (<600,000 pounds) for zero interest for the first five years (Hilber 2015).

These schemes have been designed and implemented with the objective of helping the buyers, especially the first-time ones in the residential sector of the country.

Implications Shared Ownership- Under this scheme, the residents are entitled for the facility of paying only a share of the total price of the house (may range from 25% to 75%) at once and then can pay rent for the rest.

The policies implemented with the objective of increasing the welfare of the residents of the country as a whole, are seen to have mixed effects on the economy. The schemes have led to an increase in the demand for the housings, which is expected to increase the prices of the same if the supply does not increase accordingly. This can be actually seen to be happening in the housing sector of the country in the contemporary period:

Figure 12: Increase in the housing prices after implementation of Help to Buy Scheme in UK

(Source: Chu 2018)

This if not addressed from the supply side, can have considerable negative implications on the economy of the country and on its residents in the long run (Finlay, Williams and Whitehead 2016).

Conclusion 

As can be seen from the above discussion, the house prices in the United Kingdom has been subjected to considerable fluctuations over time, with the dynamics being more visible within the period of 2006 and2016, much of which can be attributed to exogenous factors like Global Financial Crisis of 2008 as well as endogenous factors like dynamics in the inflation and unemployment scenarios in the country. In the current situations, there exists affordability issue in the housing sector of the country, to address which the government of the country has implemented several aiding schemes for the residents of the country. However, these schemes are seen to be increasing the prices even more by increasing the demand in the housing sectors. Supply side increments in the same proportions are thus becoming necessary to combat the situation of lack of affordability and availability in the housing market of the country.

 

References 

Bell, D.N. and Blanchflower, D.G., 2013. Underemployment in the UK Revisited. National Institute Economic Review, 224(1), pp.F8-F22.

Chu, B. (2018). Despite what you may have heard, Help to Buy has not helped. [online] The Independent. Available at: https://www.independent.co.uk/voices/despite-what-you-may-have-heard-help-to-buy-has-not-helped-the-housing-crisis-a6887586.html [Accessed 3 Apr. 2018].

Collinson, P. (2018). Collapse in number of young homeowners revealed. [online] the Guardian. Available at: https://www.theguardian.com/money/2015/jan/22/collapse-homeownership-property-ons-report [Accessed 3 Apr. 2018].

Dailymail.co.uk (2018). New scheme will allow buyers to buy £500,000 homes with just FIVE PER CENT deposit as PM tries to kick-start housing market. [online] Mail Online. Available at: https://www.dailymail.co.uk/news/article-2113704/New-scheme-allow-buyers-buy-500k-homes-just-FIVE-PER-CENT-deposit.html [Accessed 3 Apr. 2018].

Derudder, B. ed., 2012. International handbook of globalization and world cities. Edward Elgar Publishing.

Fethi, S. and Katircioglu, S., 2015. The role of the financial sector in the UK economy: evidence from a seasonal cointegration analysis. Economic research-Ekonomska istraživanja, 28(1), pp.717-737.

Fingleton, B., Garretsen, H. and Martin, R., 2012. Recessionary shocks and regional employment: evidence on the resilience of UK regions. Journal of Regional Science, 52(1), pp.109-133.

Finlay, S., Williams, P. and Whitehead, C., 2016. Evaluation of the Help to Buy Equity Loan Scheme.

Gov.uk. (2018). Budget 2016 - GOV.UK. [online] Available at: https://www.gov.uk/government/publications/budget-2016-documents/budget-2016 [Accessed 16 Mar. 2018].

Hilber, C.A., 2015. UK Housing and Planning Policies: the evidence from economic research.

Montgomerie, J. and Büdenbender, M., 2015. Round the houses: Homeownership and failures of asset-based welfare in the United Kingdom. New Political Economy, 20(3), pp.386-405.

Ngai, L.R. and Tenreyro, S., 2014. Hot and cold seasons in the housing market. American Economic Review, 104(12), pp.3991-4026.

Oxley, M. and Smith, J., 2012. Housing policy and rented housing in Europe. Routledge.

Pwc.co.uk. (2018). 3 – UK Housing market outlook. [online] Available at: https://www.pwc.co.uk/assets/pdf/ukeo/ukeo-july-2016-housing-market-outlook.pdf [Accessed 3 Apr. 2018].

Shiller, R.J., 2012. The subprime solution: how today's global financial crisis happened, and what to do about it. Princeton University Press.

Tradingeconomics.com (2018). United Kingdom GDP Growth Rate | 1955-2018 | Data | Chart | Calendar. [online] Tradingeconomics.com. Available at: https://tradingeconomics.com/united-kingdom/gdp-growth [Accessed 3 Apr. 2018].

Tradingeconomics.com (2018). United Kingdom Inflation Rate | 1989-2018 | Data | Chart | Calendar. [online] Tradingeconomics.com. Available at: https://tradingeconomics.com/united-kingdom/inflation-cpi [Accessed 3 Apr. 2018].

Tradingeconomics.com. (2018). United Kingdom House Price Index | 1983-2018 | Data | Chart | Calendar. [online] Available at: https://tradingeconomics.com/united-kingdom/housing-index [Accessed 3 Apr. 2018].

Tradingeconomics.com. (2018). United Kingdom Unemployment Rate | 1971-2018 | Data | Chart | Calendar. [online] Available at: https://tradingeconomics.com/united-kingdom/unemployment-rate [Accessed 3 Apr. 2018].

Wilcox, S. and Perry, J., 2014. UK housing review. Coventry: Chartered Institute of Housing.

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