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How to predict house prices.

Extracts from this document...

Introduction

How to predict house prices. Business Studies / Economics University level 2004 Introduction When looking at is it possible to predict house prices? what certainness is there that those who predict will have an accurate account of what will happen. The most explosive action in the last few years was the boom and bust of the late 80's to the early nineties where over half a million homes were repossessed, thousands of jobs were lost and a few million home owners were left with a mortgage worth more than the value of their property. At the end of 1991, more then a quarter of a million properties were at least six months in arrears with their mortgages, also approximately 90,000 households who were more then twelve months in arrears. Therefore many people were not prepared for the bubble to burst in the housing market. But the indicators that had an impact on the housing market then could be used as prediction tools for future trends regarding house prices. The property boom was due to the deregulation of the financial institutions from the mid-1980s, this ended the quantity-rationing of mortgages, allowing banks to compete equally with building societies which increased the volume of loans, doubling between 1980 and 1990, and increased availability of high proportion mortgages, (up to 100 per cent) and high loan to income ratios. Growth in incomes also increased the demand for home ownership, and tax cuts increased personal disposable income and expenditure. Domestic rates were abolished in the financial year of 1988/89 in England, which suddenly made housing; particularly at the upper end of the market appear more affordable. ...read more.

Middle

This graph shows that the interest rates affect the economic growth through supply and demand. Diagram 2. Diagram 2. shows the proper pattern that the theory suggests between inflation and GDP or output. This is because interest rates directly control investment. Investment controls supply and demand. When interest rates goes down demand goes up and output goes up. Diagram 3. Diagram 3 shows a positive correlation between employment and economic growth. This is that as the GDP increases although not on the same level all the time employment increases as well. This is obvious because when economic growth increases firms are producing more so therefore there are more jobs. On this graph there's one large exception during the boom years of 1988 to 91. During the years 88 to 93 the levels of employment rose at a much higher rate than the GDP. This is where the boom bust economic cycle did not create true employment, because GDP did not increase with the increase in employment. Diagram 4. "New house building peaked at over 414,000 in 1968. In 2002 only 170,000 new homes were built in Britain, slightly above the 2001 figure, which was the lowest total of new homes built in any year since 1947." Nationwide press release 2002 Wales (89%) and East Anglia (70%) have the greatest number of new detached houses being built, new detached homes in Greater London account for less than 1% of new homes. Halifax estimates that if the current low level of new house-build continues, there will be a major shortage of homes in the UK by the year 2020. ...read more.

Conclusion

Interest rates can be linked to economic growth, the lower the interest rates the greater the economic growth will be therefore higher levels of employment will mean increased income and therefore a greater demand in housing which will push the price of housing up. Economic growth can be slowed down simply by increasing the interest rates thus reducing consumer expenditure. Government intervention can have an impact on house prices such as a reduction in percentage taxed on wages, lower taxes, right to buy, stamp duty, all have an effect on the types of property which will be in supply and through demand as more people will be able to afford housing. Changes in the structure of financial institutions with there flexibility has meant that more people are able to obtain mortgages, and buying houses has become more affordable for households on average. Therefore if there is a lack of supply of new housing this will mean that demand will increase. In general the price of housing has gradually gone up in the last decade at about the same level as real GDP. The problem with predicting house prices is that there will always be a time lag between a change in any of the variables mentioned above as well as fashions that can change within the housing market as consumers may want to leave cities and move to rural areas (counter urbanisation). Sudden events like terrorist attacks where economists will predict a slow down may have little effect if the economy if the economy is fertile for growth, all it will do will scare some into waiting to see what others will do. ...read more.

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