Year 2003:
From the graph figure we see that, there is a very small fluctuate in house prices in all the year. The average price of house in jannuary-2003 was £123,073 in all UK and £249,246 in greater London. In December the price changes to £137,684 in all UK and £258,221 in Greater London. So the change of house prices trend was upwards.
Year 2004:
From the graph figure we see that, there is an increase in house price in all the year 2004. The average price of house in jannuary-2004 was £139,514 in all UK and £261,215 in greater London. In December the price changes to £156,194 in all UK and £276,347 in Greater London. So the change of house prices trend was upwards.
Year2005:
From the graph figure we see that, there is an increase in house price in all the year 2005. The average price of house in jannuary-2005 was £156,455 in all UK and £276,119 in greater London. In December the price changes to £160,501 in all UK and £281,610 in Greater London. So the change of house prices trend was upwards in 2005.
Year 2006:
From the graph figure we see that, there is an increase in house price in all the year 2006. The average price of house in jannuary-2006 was £161,471 in all UK and £283,931 in greater London. In December the price changes to £172,643 in all UK and £310,013 in Greater London. So the change of house prices trend was still upwards in 2006.
Year 2007:
From the graph figure we see that, there is an increase in house price in all the year 2007. The average price of house in jannuary-2007 was £174,612 in all UK and £316,428 in greater London. In December the price changes to £184,459 in all UK and £352,278 in Greater London. So the change of house prices trend was upwards in 2007.
Year 2008:
From the graph figure we see that, there is a small increase in house price in the beginning of year 2008 then it starts decreases. The average price of house in jannuary-2008 was £185,656 in all UK and £356,120 in greater London. In June the price changes to £180,781 in all UK and £345,136 in Greater London. So the change of house prices trend starts downwards in 2008.
House Price Index report -
All England & Wales vs. Greater London Council
(January 2003 - June 2008)(www.landregistry.gov.uk)
From this time series graph we can see the movement of house prices in UK and Greater London from January 2003 – June 2008.
Figure Analysis from Graph: From the Time series graph we can see that year 2003 to year 2008 there is a tendency of increasing house prices. Then suddenly it starts decreases from the beginning of 2008.From all the year it increases all the way then for the impact of credit crunch the price starts decreases from 2008.In January 2003, the average price was £123,073 for all UK and £249,246 for greater London. The house price rise 1% to 7.7% in 2003. In 2004 the price was flexible and increase only 0.7% from December 2003.The UK house prices increase annually 20.3% from July 2003 to July 2004. It same increase in all the year till 2008 then there is a slight decrease of prices. House prices fall by4.3% in the 2nd quarter of 2008. Annually the house price fall by7.3%in London and 6.1%in all UK.
IDENTIFICATION OF BACKGROUND FACTORS:
A House price in UK changes in different reasons. It is not stable. These reasons are called factors. After a long time of price increasing, at last it start decreases it UK. The various factors which determine the house prices changes are as follows:
Demand side Factors:
The factors which affect the demand curve to shift right before the credit crunch of 2008 are:
- Income/Economic growth
- Interest rates
- Availability of mortgage finance
- Demographics
- Customer confidence
- Speculation
- The price of rented accommodation
- Low unemployment
- Location
Q Q1 Quantity
A graph show at a price of P, a quantity of Q0 was originally demanded. But now after the increase in demand Q1 is demanded.
After year 2008 credit crunch affects the housing market, which resulting the decrease in demand of buying property. The various reasons why house price decrease are:
- Shortage of mortgage finance
- The ratio of house prices to income has risen then any other time
- House price become unaffordable for first time buyers
- Speculation
- Prediction for house prices
These factors Shift the demand curve to left because of decrease in demand from people to buy property. The following graph shows the shift of demand curve:
Q2 Q0 Quantity
Some brief discussion of some factors:
Income:
The increasing income is a factor to changes the house price. When the income of people increases they want to spend the extra money for buying houses. So there is more demand for houses to buy. Also the reason for demand is living standard rise. So it makes the demand curve to shift right.
And if the economy goes down and more unemployment people then the demand of house prices also fall. In 2003 in UK average income of a household was £34,197and average house price was £115,181. So the ratio of house price to income was 3.36.So it was easy for the people to buy houses and it increases the demand of house. But in 2008 the average income was about£38,302 and house price £197,000.Therefore house price to income ratio about 5.1. So the increasing ratio of house prices to income shifts the demand curve left. (
Interest Rates:
UK is very sensitive for any changes in interest rates. In UK mortgage rate is variable for different home owners. So any increase in interest rate will increase the mortgage to rise. So the mortgage repayments also become high. So there is a less demand for houses in the market.
In UK the Bank of England set a base rate for the whole economy which affects the commercial rates. But sometime base rate decrease but the commercial bank didn’t follow it on their customers. The starting of 2008, the bank of England cut the base rate from 5.5% to 5.0% but still the cost of mortgage is rising. ()
Quantity
Availability of mortgage Finance:
It is a big factor for housing prices. With the increasing competition of banks on mortgage products the lenders was attract the customer with 100%mortgage,interest only, multiple mortgage, self certification mortgage, mortgage up to 6 times income. So there was a high demand of buying houses, which makes the demand curve to shift right.
But after 2008 it is very hard to get any mortgage finance. The council of mortgage lenders said the approval of mortgage has fallen to the lowest since 1991.Banks is struggling with credit crunch to raise their finance and reduce the lending for mortgage and increase the cost of mortgage. That’s why demand for houses decrease. ()
Quantity
Customer Confidence:
During the period 2003-07 availability of mortgage finance make customer interest to buying house. People believed that the house price will continue rising. Also the economy was improving their growth and prosperity. So there was a speculative buying in the housing market. Investors start buying house rather then shares. If people know about the credit crisis of 2008 which falls the house price then it can encourage them to sell property not buying. So there was a High demand on market for houses. From 2008 some potential buyers start thinking to rent rather then buy a property. So now there is a major drop of demand in housing market.
Demographic factors:
Increasing number of people increases the demand for houses. People from EU are boosting in UK rises the house prices. other demographics like increasing divorce rate, life expectancy and more older people living alone, less marriage, children live separate with parents are high in UK. These factors make the demand in housing market and increase the price.
Speculation:
Traditionally the view to buy a house is not for business or asset, it’s a place to live in. But an increasing number of buy to let investors are buying property for both gaining the capital and earning money from rent during the past decade. These effects in the housing market to change prices. Because these speculators only buy when the price fall and sell when price increases. But after 2008, these people start leaving the market because of drop in demand.
First time buyer:
As the house price increase, rents also become expensive. So there is more demand to buy a house, which makes first time buyers. As buying a house was very easy before the credit crunch. But now it becomes more unaffordable to buy because of increasing price to income ratio. The credit crunch makes it difficult for the first time buyer. So it affects the demand of house prices.
Supply Side Factors:
Short run supply
If we compare the supply of houses in case of short run then it is limited or fixed. Because it takes time to build houses. So demand effects more than supply in short run
Long run supply
- Availability of planning is limited in rural areas.
- Opportunity cost for builders have more profit then any other investment.
- The houses in UK especially in London are built long time before. So this may result unfit to live in.
- There is an increasing of costs for building new houses in UK, which might resulting supply curve to shift left.
Quantity
Graph shows that for cost of building house shift the supply curve from S0 to S1.
5) In UK it is known that there is a shortage of houses then its demand which risen the house price faster then inflation and income. But house price can still be fall even there is shortage of property supply. In 1992 property price in London fell down over 20 %, even there was limited supply. A shortage of supply means it will be on average higher price. It does not mean they are incapable of falling.(prices.co.uk)
Potential trend of house prices in next two years:
From the above analysis, we can see that all the factors that increase the demand of house prices from year 2003 to 2007 is suddenly decrease for credit crunch. In July, house prices saw the tenth consecutive fall in this year. Average house prices down by 1.2% over the month, compared to 1% fall in June, 2008 and 4.4%decrease in the last one year. This represents the lowest annual rate of growth. ( credit crunch has terribly affects the housing market this year. Credit crunch means a sudden short of money for the bank for lending or mortgage to customers. For that reason declined for loan and mortgage has risen then last few years. Government is trying to get rid of it. In UK credit crunch have done serious problem for northern rock. They have a high % of loans which is finance through reselling the capital market. As a result they have to ask for urgent funds from bank of England. These things affect customer’s savings. This credit crunch could last long. But a country likes UK it might stay one to three year. After that the house price will hopefully start rising. Normally in UK there is too much demand but very little supply of house. So anytime the credit crunch will remove from market, prices normally starts increase. Possibility is within two years. So it might be a good business for the long term investors. Now people are expecting that housing market will remain in fall for coming 2 to 3 years. Only possibility is in East London area that, the prices will rise due to Olympics games.
Conclusion:
Assuming from the whole study it is very hard to say about the pricing market of house in UK. Last five years the price was increase consistently. But this year credit crunch makes it weaker. But if the government get rid of it they should stop the lenders to make the housing market more easy like before, which make the market increasing price not necessarily. As house is always demandable and population increases, there will be a increasing in price normally after the credit crunch period. It would be wrong to completely rule out the possibility of a house price crash. It would be completely wrong to think that price will only crash. From the study and evidence it is for sure that the price may increase at any time.
BIBLIOGRAPHY:
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Michael Parkin and David king (95): Economics 2nd edition British library: Page 42 to 83.
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Slomaon, John. 2000. Economics. 4th Edition. Prentice Hall (Page 35-50)
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