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Can Economist Predict House Price Movements

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Introduction

CAN ECONOMIST PREDICT HOUSE PRICE MOVEMENTS? WHAT ARE THE PROBLEMS THEY FACE IN DOING SO? This essay will help determine the facts around economists predicting house price movements and the problems in doing so by studying material from the Economic Trend Annual Supplement (The National Statistics), Halifax Fact book, Forecasts from Halifax and Nationwide Appendix A. Yearly data series are collected for the AHP (average house price) and DIPH (disposable income per head) which will help create charts and analysis of house price movements between the years 1990 to 2000. `Simple linear regression aims to find a linear relationship between a response variable and a possible predictor variable by the method of least squares'1. Therefore these charts will enable us to define the relationship between the average house price and disposable income. The result of this data will then be used to create regression to measure the association between house prices and disposable income enabling the data to conduct a hypothesis test to discover whether economist can predict house price movements. When house price movements are observed, there are many reason that are contributing factors that are: the characteristics are: types of house (bungalows, flats terraced, detached and semi detached); types of buyer (former owner buyer & first time buyers); property ages (modern, new & old); inflation; interest rates; unemployment; disposable income; and affordability The characteristics mentioned would increase or decrease the value of the property i.e. a newly built and decorated home is relatively high in price compared with the holder home which may require renovation as mentioned by Ali Anari & James Kolari. ` As a consumer good, inflation increases the construction costs of new houses through higher costs of building materials and construction wages. Higher construction costs of new houses result in higher new house prices.'2 In addition the value of a house will depend on the characteristics of the property. ...read more.

Middle

When interest rates rise, this causes AD (aggregate demand) to shift to the left due to the decrease in demand. ''The fall in interest rates can also be expected to ease the financial constraints on the personal sector a little and the saving ratio may gradually begin to drift downwards, although there is unlikely to be a sharp turnaround until lower interest rates have been sustained for some time.'13 When table 1.2 is analysed it can be seen that the real for each year between 1990 and 2000 has been calculated. During the year 1995 and 2000 the real rate was 3.0. Although the fundamentals are the same mortgage lending is different compared with inflation, this does not make it more affordable. Inflation can be caused by various reasons such as high oil prices, when the UK joined the EEC, war in other countries affecting UK food and retail price and high demand for housing etc. `Monetary and fiscal policies have succeeded in lowering inflation in industrial countries but the broader challenge of macroeconomic stabilization remains in two important respects. One is minimizing boom and bust cycles in economic activity and their disruptive effects on the financial system. The other is to keep at bay inflationary pressures while also preventing the emergence of its converse namely, generalised price deflation.'14 There are three types of inflation: menu cost inflation which involves adjusting price list or labels associated with cost; productions that are related to the constant rising cost; and finally inflation that is created by continual rise in aggregate demand.15 Through the fiscal or the monetary policies the government can try to and control inflation by increasing or decreasing interest rates and reducing low unemployment etc. 'Monetary policy is not well equipped alone to deal with regional asset price booms. Fiscal and regulatory policies thus have a potentially important role to play.'16 In spite of this, there are some factors that are beyond the governments control, such as increase in oil prices, war in other countries which affects the UK food and retail prices. ...read more.

Conclusion

1 http://www.stats.gla.ac.uk/steps/glossary/paired_data.html#simplinregr 2 Article Title: House Prices and Inflation. Contributors: Ali Anari - author, James Kolari - author. Journal Title: Real Estate Economics. Volume: 30. Issue: 1 3 Article Title: Predicting Spatial Patterns of House Prices Using LPR [Local Percentile Rank] and Bayesian Smoothing. Contributors: John M. Clapp - author, Alan E. Gelfand - author, Hyon-Jung Kim - author. Journal Title: Real Estate Economics. Volume: 30. Issue: 4. Publication Year: 2002. Page Number: 505 4 John Coupe, Regional Manager, Halifax Estate Agency, Halifax house price index Greater London 5 Article Title: House Prices and Inflation. Contributors: Ali Anari - author, James Kolari - author. Journal Title: Real Estate Economics. Volume: 30. Issue: 1. Publication Year: 2002. Page Number: 67+. COPYRIGHT 2002 American Real Estate & Economics Association; COPYRIGHT 2002 Gale Group 6 Publication Information: Article Title: Predicting Spatial Patterns of House Prices Using LPR [Local Percentile Rank] and Bayesian Smoothing. Contributors: John M. Clapp - author, Alan E. Gelfand - author, Hyon-Jung Kim - author. Journal Title: Real Estate Economics. Volume: 30. Issue: 4. Publication Year: 2002. 7 Essential Quantitative Methods for Business Management & Finance-Les Oakshot-2nd Edition-2001-page 205 8 Statistics-Frank Owen & Ron Jones-4th edition-Pitman Publishing-1994 9 Harold D. Delaney, Scott E. Maxwell; Lawrence Erlbaum Associates, 1999 10http;//ei.cornell.edu/student/glossary.asp 11 http://www.cas.lancs.ac.uk/glossary_v1.1/hyptest.html#hypothtest 12 Book Title: Intermediate Macroeconomics: Output, Inflation, and Growth. Contributors: Thomas Mayer - author, D. C. Rowan - author. Publisher: Norton. Place of Publication: New York. Publication Year: 1972. Page: 332. 13 Publication Information: Article Title: The UK Economy. Contributors: Nigel Pain - author. Journal Title: National Institute Economic Review. Issue: 142. Publication Year: 1992. Page : 10 14 Publication Information: Article Title: Asset Prices and the Business Cycle. Journal Title: World Economic Outlook. Publication Year: 2000. Page Number: 77. 15 Economics- John Sloman-5th Edition- 2003 16 Publication Information: Article Title: Asset Prices and the Business Cycle. Journal Title: World Economic Outlook. Publication Year: 2000. Page Number: 77. 17 http://news.bbc.co.uk/1/hi/business/3333605.stm 18 http://www.themovechannel.com/sitefeatures/news/2004-october/4a.asp 19 http://news.bbc.co.uk/1/hi/business/3999607.stm 10/11/2004 1 ...read more.

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