The UK Housing Market Is it actually working? The UK Housing Market Is it actually working?

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

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

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

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

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

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

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

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 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

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

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

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

£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 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

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

Mortgage Advances for Buy-to-let Properties

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

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?

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

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

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