The UK Housing Market A barometer of the economy?

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

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

3. Who benefit from rising house prices? • The losers • The first-time buyer • Those upscaling • The gainers • Downsizers • Elderly going into homes • Emigrants • Those largely unaffected • Those not moving • Those moving to another areawhere house prices are similar

4. 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 • The first-time buyer • Those upscaling • Those largely unaffected • Those not moving • Those moving to similar priced houses

5. 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 • D and/or S P • Problem of inelasticity of supply

6. Supply curves with different price elasticity of supply S2 P2 P1 D1 Q1 Q2 P S1 P0 D0 Q0 O Q

7. 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 • 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

8. Causes of rising house prices • Shifts in demand: short-term causes • Incomes • Current and expected • Interest rates • Current and expected

9. Halifax variable mortgage rate

10. 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

11. £000s Ratio of average house prices to average earnings Source: based on Halifax House Price Index (HBOS)

12. Causes of rising house prices • 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

13. Speculation compounding a price rise b P2 D2 P Assume an initial rise in demand S1 People believe that the rise in price to P2 signifies a trend. a P1 D1 O Q

14. Speculation compounding a price rise S2 c P3 D3 P S1 The effect of these shifts is a price rise to P3 The rise in price to P2 is compounded by speculation Sellers hold back, waiting for prices to rise. Buyers rush to buy now before prices rise any further. b P2 a P1 D2 D1 O Q

15. Speculation compounding a price fall P S1 a P1 P2 b D1 D2 O Q

16. ? Complete the diagram by adding a new demand curve (D3)and a new supply curve (S2) to illustrate the effect of speculation.

17. Destabilising speculation: initial price fall S2 c P3 D3 P S1 a P1 P2 b D1 D2 O Q

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

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

20. Causes of rising house prices • Shifts in supply: short-term causes • Speculation • Rents (letting property isa substitute) • Shifts in supply: long-term causes • House building • Costs • Availability of land • Planning regulations

21. What will happen to House Prices? Is there going to be a crash?

22. Link

24. 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

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

26. 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

27. Quarterly inflation rates for(a) the northand(b) the south east (a) (b) Source: based on Halifax House Price Index (HBOS)

28. 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

29. What can the government do? • Demand • Making house ownership more affordable • Tax relief • Schemes for mortgage sharing • But ultimately increases demand • Supply

30. What can the government do? • Demand • Making house ownership more affordable • Tax relief • Schemes for mortgage sharing • But ultimately increases demand • Supply • Relaxing planning regulations • Public housing

31. 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.