Housing Market in the UK

Question: The British housing market has "deep, deep" problems, according to the Governor of the Bank of England. In an interview with Sky's Murnaghan show, Mark Carney warned that rising house prices represented the biggest current risk to the economy.He added that the number of large mortgages being approved to house buyers was on the rise and that the UK was in need of new house building. Mr Carney said: "The issue around the housing market in the UK is there are not sufficient (numbers of) houses (being) built." One of the biggest issues of the UK economy if the constant changes in the housing market. Using the above article passage and any other you may research, write a report analysing what are, the main reasons for those changes. Is the microeconomic or the macroeconomic environment the one that affects prices most? Are the property market challenges linked more to supply or demand?, or maybe we have to consider macroeconomic issues like the exchanges rates, growth and unemployment? Answer: Introduction: The key role in the economy is played by the housing market. It exercises its influence on the economy through output growth, stability in the financial market and the monetary policy of transmission mechanism. The decision of the household to purchase a house is relevant to the economy as it involves a large part of the households income as well as the expenditure. The UK housing market is characterized as a volatile market. For the last few decades, the UK housing market has witnessed two major booms and busts. (Ons.gov.uk, 2015) The governor of the Bank of England, Mark Carney in an interview with Skys Murnaghan show, has showed concern about the property boom which can pose a big risk to the Britains economic recovery. The house prices rose at the fastest rate in the more than six years and have ascended to 8.9% on a yearly basis. This rise in house price can be accounted for the shortage of new homes. The deep structural problem associated with the UK housing market can be tackled buy two factors. First, the bank must ensure enough reserves to resist the risks of bad loans associated with the downturn of the housing market. Second, there should be a check on the lending procedure and ensure that mortgages be sanctioned to those individuals who could afford them. (E-Residentials | Online Estate Agent, 2014) Reasons for changes in the housing market: The constant changes in the housing market are owing to several factors. These factors influence the housing market and alter the house price. Some of the reasons behind the changes in the housing market of the UK are: (Pettinger, 2011) Economic growth- It is regarded that the demand for house is income elastic as house is considered to be a luxuries good. Now as demand for house is dependent on the income, so as income decreases, people cannot buy houses and they are unable to make their mortgage payments ending up their houses to be taken in possession by the banks. The GDP growth of the UK in the third quarter of 2014 was 0.7% which made the nation the fastest growing G7 economy in spite of the economic slowdown. (Allen, 2014) This has resulted in the rise in income of the citizens which furthered raised the demand for house which ultimately hiked the house price. (Positive Money, 2013) Unemployment- The level of unemployment is associated with the economic growth in the UK. Since the UK experienced a GDP growth, the unemployment rate fell to 6% which is recorded to be the lowest. The employment rate rose to 73% which means that people have been employed. This drive in employment caused the incomes to rise resulting in an increased demand for house and this excess demand for houses increased the prices. (Monaghan and Inman, 2014) Interest rates- The year 2014 was marked with stable interest rate at 0.5% which enabled the purchase of new houses. The interest rate affects the monthly mortgage payment cost. If the interest rate is high, this would increase the mortgage payment. As a result, the demand for houses will fall. But since the interest rate did not rise in 2014 in the UK, people were willing to purchase houses, soaring up the demand for houses and thereby raising the price of the houses. (BBC News, 2014) Consumer confidence- The consumer confidence is very important for the sale and purchase of the house or taking the risk to mortgage them. In this regard the expectation towards the housing market is relevant. If people foresee that the price of the houses is rising then they will be willing to purchase them which will raise demand. Mortgage availability- According to the Bank of Englands latest Credit Conditions report, lenders in 2014 were willing to extend a rise in the availability of mortgages. The rise in the availability of mortgages with low deposits eased up the procedure for getting mortgage. This raised the demand for buying houses. (The Guardian, 2014) Supply- Mark Carney stated that the problem of shortage of new house could not be solved by the Central Bank. At 123,000 units per year, the rate of house building was well below the 200,000 which is considered by many economists as the minimum scale. Thus, the shortage of supply of houses led to a situation of excess demand which raised the price of the houses. (Inman, 2015) Microeconomics and macroeconomics factors affecting price: The basic determinants that affect the housing prices is the demand and supply of the houses but they are influenced by the microeconomics and macroeconomics factor. It is startling to see that how people are engaging themselves to investment in the real estate sector. It is also necessary to understand the impact of the macro and micro variables that can affect the decision of the purchase of the house. Some of the macro and micro factors that affect the housing prices are discussed below. (Tan, 2015) (Ft.com, 2015) Macroeconomic factors: Population growth considering foreign workforce and migration- The population growth rate in the UK in 2014 was recorded to be 0.54%. A population growth imposed pressure on the housing market. (Indexmundi.com, 2015) The increase in the new citizen and the shortage of houses resulted in a situation of excess demand, raising the price of the house. The Malthusian theory states that population of human grows at a geometric rate. The four stages of demographic transition also tell us a progressive change in phase from high birth rate high death rate to a phase of low birth and death rates. All these imply that even if there is little population growth, there is still not sufficient accommodation to absorb the new entrant. (Galor and Weil, 2000) Employment and wage growth- As there is an increase in the employment rate, there is also a growth in wage. This increases the income in the hands of the people which enhances the credit liability confidence. People will now take up loans or mortgage to purchase house. Thus, the demand rises and the property price rises. Construction costs- The conceptualization of several government policies extends to regulate the building projects and this make the developers more conscious about the building projects by delaying it. This causes a shortage in the supply of the house raising the price. The increase in construction cost and the price of raw materials may also raise the price of the house Financing properties- The smooth and easy access to mortgage and loan facilities by the people gear them up to buy properties. This raises the demand for houses and as a result price rises. This can be countered by restricting credit availabilities by government policies which could drive the price down. Land scarcity- The ever increasing population posed a threat to the availability of land. There evolved the issue of scarce land, which resulted in excess demand of land for accommodation. This created an excess demand for house and thus price rises. (McGrath, 2014) Exchange rate- the changes in the exchange rate influence people on their buying decision of property. The depreciation of exchange rate drives up the price of property in the foreign country and the opposite happens when appreciation takes place. Microeconomic factors: Location and amenities- An individual who is willing to buy a house would definitely consider the locality with amenities associated with the property like accessibility of expressways, shopping malls, markets, parks, food centre etc. All these location attractiveness changes the value or price of the house. Government plans- Government may chalk out plans for a particular location by advancement in infrastructures. This future plan associated with the location can drive up the property price. Building style- The architectural design of a house may affect its price. If the design of the house is unique and cannot be replicated then the value of the house increases. Taste and preferences- The taste and preferences of an individual os acquired by the level of education. This reflects the different types of choices of house depending upon the level of education received. It is the macroeconomic factors that increase the price sensitivity of the houses. The major issues like unemployment rate, population growth rate, and construction cost etc. affect the housing prices instantaneously. But the microeconomic factors are equally relevant to determine the prices of the housing sector. Property market challenges: The challenges faced by every market are associated with the demand and supply conditions. It is evident from the rising prices of the houses that there prevailed disequilibrium in the demand and supply conditions in the UK. The supply of houses was unable to keep pace with the demand for houses. A situation of excess demand crept up, driving the price of the house up. Thus there is an urgent need to expand the supply of housing. When the demand and supply conditions are regarded as the important factors to determine equilibrium in the housing market, it is equally important to focus on the macroeconomic and microeconomic factors that influence the demand and supply side of the housing industry. The macroeconomic and microeconomic factors like the economic growth, population growth, locations and amenities, government plans etc. all these affect the pricing of the houses. Thus, the challenges in the property market are influenced by the macroeconomic environment as well as the demand and supply side. (Economicsonline.co.uk, 2015) (UK Parliament, 2015) Conclusion: Our report is based on the analysis of the concern of the governor of Bank of England, Mark Carney. The rise in the price of the house is inevitable as far as there is a shortage in the supply of houses. This problem of supply shortage needs to be tackled by the providing subsidies to the private house builders, relaxing house building regulations, providing grants and tax concession to builders who build house on certain areas etc. The need to regulate demand is also relevant to suppress the rise in price. Thus, to stabilize the demand and supply condition of the housing market, it is necessary to maintain the macroeconomic factors that affect the housing prices. (Galati, Teppa and Alessie, n.d.) (White, 2014) References Allen, K. (2014). UK on track to be fastest growing G7 economy despite slowdown.The Guardian. [online] Available at: https://www.theguardian.com/business/2014/oct/24/uk-economic-growth-slows [Accessed 21 Feb. 2015]. BBC News, (2014).Rates 'to stay at 0.5% this year'. [online] Available at: https://www.bbc.com/news/business-25561477 [Accessed 21 Feb. 2015]. Economicsonline.co.uk, (2015).UK house prices. [online] Available at: https://www.economicsonline.co.uk/Competitive_markets/House_prices.html [Accessed 21 Feb. 2015]. E-Residentials | Online Estate Agent, (2014).E-Residentials | Online Estate Agent. 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