The UK Housing Market A barometer of the economy? The UK Housing Market A barometer of the economy?

Source: based on Halifax House Price Index (HBOS) UK house price inflation (annual percentage rates, adjusted quarterly)

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

Who benefit from falling house prices? The losers –Those with negative equity wanting to move –Downsizers –People exiting the housing market Emigrants Elderly going into homes The gainers –Those with negative equity wanting to move –Downsizers –People exiting the housing market Emigrants Elderly going into homes The gainers –The first-time buyer –Those upscaling Those largely unaffected –The first-time buyer –Those upscaling Those largely unaffected –Those not moving –Those moving to similar priced houses –Those not moving –Those moving to similar priced houses

Determination of 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

Supply curves with different price elasticity of supply P Q O P0P0 Q0Q0 S1S1 S2S2 D0D0 D1D1 Q2Q2 Q1Q1 P2P2 P1P1

Determination of 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

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

Halifax variable mortgage rate

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 Required deposit as % of value of property Problem of the credit crunch 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 Required deposit as % of value of property Problem of the credit crunch

£000s Ratio of average house prices to average earnings Source: based on Halifax House Price Index (HBOS)

Causes of rising house prices Shifts in demand: short-term causes –Incomes –Interest rates –Availability of mortgages Shifts in demand: short-term causes –Incomes –Interest rates –Availability of mortgages –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

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

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 effect of these shifts is a price rise to P 3 Speculation compounding a price rise

P1P1 P2P2 P Q O S1S1 D1D1 D2D2 a b Speculation compounding a price fall

? Complete the diagram by adding a new demand curve (D 3 ) and a new supply curve (S 2 ) to illustrate the effect of speculation.

P1P1 P2P2 P Q O P3P3 S1S1 S2S2 D1D1 D2D2 a b D3D3 c Destabilising speculation: initial price fall

Mortgage Advances for Buy-to-let Properties Source: Council of Mortgage Lenders * projected Advances in period (£m) % of total advances

Causes of rising house prices Shifts in demand: long-term causes –Population growth Immigration and emigration –Population distribution Family size Regional trends Income distribution Shifts in demand: long-term causes –Population growth Immigration and emigration –Population distribution Family size Regional trends Income distribution

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

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?

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What will happen to house prices? Short-term: probably fall sharply –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: B of E reluctant to reduce rate –Flats fall more than houses Short-term: probably fall sharply –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: B of E reluctant to reduce rate –Flats fall more than houses

Source: based on Halifax House Price Index (HBOS) Inflation rates for (a) flats and (b) semi-detached houses (a) (b) * projected

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 (a) (b)

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? 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? 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

Housing as a barometer of the economy Demand reflects incomes –Recession causes lack of demand People cannot afford to move People less likely to move to other locations –Exaggerated effect Interest rates –Depend on inflation –Reflect credit conditions –Affect the housing market Housing market reflects confidence –Demand –House building Housing market affects other markets –DIY, furniture, repairs, etc. Demand reflects incomes –Recession causes lack of demand People cannot afford to move People less likely to move to other locations –Exaggerated effect Interest rates –Depend on inflation –Reflect credit conditions –Affect the housing market Housing market reflects confidence –Demand –House building Housing market affects other markets –DIY, furniture, repairs, etc.