How to predict house prices.

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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. After Black Monday, October 1987, interest rates fell to a new low of 7.5%. Therefore this increased the demand for homes where a shortage of housing meant that the price of properties would have to increase to satisfy demand.(see diagram 2)

In 1980, the conservatives introduced the 'Right to Buy' tenants charter, which came under the 1980 Housing and Tenants' Rights Act. The government wanted all people to become homeowners. This allowed tenants who lived in the public sector the right to buy their homes. It also introduced new arrangements for financial subsidies on council housing. Reducing  the amount of assistance that came from the Government and Exchequer.

                                                                                                 

The 'Right to buy' also gave the local authority tenants a discount on the market price of housing, which encouraged more and more people to purchase their homes. The longer that a person/family unit had been held a tenancy, the more discount that would be allowed to the prospective buyer, until a ceiling of 60% was reached. The rate of owner occupation was 54% in 1981, but in the perusing fifteen years, it had risen to more then 70%.

The result of the financial deregulation, and the Right To Buy, was an increase in house prices. The rising house prices were made worse, by the changes that were introduced to the tax system on housing.

There was a worldwide recession also at this time. Unemployment was slowly rising, which reflected on real incomes. Inequality and poverty were both rising, and all this together combined to show a surge in borrowing and consumption, credit and house prices. The government in an attempt to slow down the economy put the basic interest rates up. It was hoped that this would slow down the economy and stop the rise in inflation. This failed for the government and resulted in a recession.

High interest rates made industries struggle and led to high unemployment levels. In May 1988, interest rates had been at 9.5%, two years later, increased to 15.4%. The increase in unemployment and interest rates meant that demand for housing. A vicious circle then formed, as jobs were being lost through the building trade, more households were being reduced to one income, and then more and more owner occupied houses were unable to pay the mortgage and the in turn ended up having arrears on the properties with eventual repossession. This shows that interest rates employment levels, government policies and worldwide economy all have to be taken into account when accessing house prices.

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The determination of price in the housing market is based on demand and supply, therefore the price the seller is willing to sell the property to the buyer and the price the buyer can afford and willing to purchase the property. If there is a great demand for property in a locality then the seller has a greater amount of power than if there is a large supply of properties with little supply then the power shifts to the buyer. Demand can be affected by internal and external factors which will be mentioned later.

Demand and supply ...

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