The housing market is a lot like other markets in the sense that it is mainly governed by the supply and demand model. And it is backed up in practice as we can see when we look at previous trends. Other social and demographic factors also help in setting house prices, for example if lots of people get divorced each half will want its own house (demand goes up) and if the age structure of the UK shows more aged people this means they will want separate housing (demand goes up). We can notice from this that demand for housing is always increasing whilst the supply staying the same, thus as an example causing the recent property boom.
The Demand side of the model is controlled by various factors. The most influential factor being mortgage finance (interest rates and credit availability). Other factors of the demand model are linked by mortgage affordability, because it gives people confidence and makes them financially flexible, thus pushing them to buy property.
One of the main potential risks this market carries with it is when it crashes it is likely to affect all other businesses. Properties form the main party of everybody’s wealth, so when house prices rise so does peoples wealth. And this leads to consumer confidence which means they spend more on other goods because they are financially secure with the price of their house to lean back on.
When houses prices were falling in the beginning of the 90’s the growth for demand was very slow and as an affect of this consumer spending fell by nearly 2% in the recession of 1991. And vice versa in the late 90’s when prices started to grow rapidly and demand went up people started to buy more goods as their house (their main asset) began to grow in price. And from this we can see a multiplier effect where other businesses are influenced by how well the housing market is doing.
The government play a role in affecting the housing market through taxation in interest rates e.t.c. Say if the government set a low interest rate the demand will go up as more people will feel they can afford to take out a mortgage to buy a house. Geographically the government affect the supply of houses by granting land to property developers, the more land granted, more houses are built and as a result prices go down and supply would reach demand.
A perfect example of this is the scheme that was introduced to move people out of London into cheap/effective housing in new town permitted by the deputy prime minister, John Prescott. As well as reaching their primary target of Easing pressure on London I believe this move gave lots more people the confidence to go and buy housing as it was cheap and there was plenty of it. And maybe these new towns is an idea worth looking into as it could help to control the housing economy and its many reaching effects.
A review stated that the 175,000 houses built in the UK in 2001 was the lowest annual level since the second world war. Recently the government accepted the Ms Barkers which is a positive step towards controlling the boom. The new homes proposed are estimated to bring down the long term increase in house prices which over the past 20 years had been 2.7% annually in Britain, compared to the EU average of 1.1%. Economists predict building an extra 70,000 houses a year would reduce the rate of increase to 1.8% per anum and building an extra 120,000 would bring it down to 1.1 percent.
The rising house prices have several reaching effects, one of them being declining affordability which is a major issue to students or 1st time buyers as their income stays the same but property prices are constantly rising, so they will decide to save for longer until they can afford to take up a mortgage and buy a house. And other effect being increased homelessness , declining affordability and social division.
The Bank of England are a major player in controlling not only the housing market but the economy as a whole. And they achieve this by using monetary policy to control interest rates along side with the government. The government has set an inflation target 2.5% +/-1%, which now forms the basis for monetary policy decisions. To meet these government requirements a Monetary policy committee meet every month, and their job is to set interest rates at an appropriate level to control the economy.
High interest rates increase the cost of mortgages and reduce the demand for most types of housing. Alternatively, a fall in interest rates should stimulate higher market demand and push house prices up. This should increase consumption associated with house-buying and the rise in prices will increase total housing wealth and make buyers more confident about their personal finances.
