Executive Summary
The grammar and readability within the HTML tags in the given text are already correct.
This report economically analyzes the housing market in the UK since 2006. The main purpose of this report is to find out the key factors affecting house demand and supply during the period. Diagrams and graphs are presented along with related data to support the main purpose. The graphs are mostly presented for London, Northern Ireland, and the UK as a whole. The main target area of this report is London, which has been compared with Northern Ireland and the UK as a whole.
Various relevant factors of house market determinants have been focused on and presented with relevant graphs to support the concept. London has experienced a big difference in almost all things compared to other parts of the UK. High population density, foreign interest, higher average income, and higher rent prices were the major factors differentiating it from other parts.
Introduction
Demand and supply are possibly one of the most basic concepts of economics, and they are the pillars of a market economy. Demand means how much (quantity) of a product or service users desire. The quantity demanded is, in fact, the quantity of a product people are willing to buy at a certain price. The relationship between quantity demanded and price is called the demand relationship.
Supply refers to the market and shows how much it can offer. The quantity supplied is related to the quantity of a particular good that producers are willing to supply in receipt of a certain price. The relation between price and the amount of a good or service to be supplied in the market is known as the supply relationship. Price, in fact, is a reflection of supply and demand.
Factors Affecting Demand of a House in the Market
Price of the House: The price of the house is the main factor in identifying the demand for a house in the market. The lesser the price, the more customer demand there will be for a particular product. Similarly, the price of a house plays an important role in analyzing the UK housing market. London has remained the most expensive place across the UK since 2006. However, Northern Ireland has consistently remained the least expensive region with an average house price of 149,000 GBP in 2011.
However, Northern Ireland has been experiencing consecutive declines since it peaked in 2007. Therefore, the demand for London houses has fallen due to a dramatic increase in prices. Keeping other factors (which are discussed next) constant, the demand for houses in London has decreased since 2006. As a result, there is a movement in the change of the demand curve in the housing market.
Despite changes in price, which cause a movement along the demand curve for housing, other non-price factors are also considerable, and variations in these factors result in a shift in the demand curve.
House Rent Price: Rent is a substitute for the purchase of a house. People often decide to buy a house when they realize that the amount they pay each calendar month is increasing. As per the above diagram, the per month rent of average houses in the UK has risen sharply over the period. In Northern Ireland, the rent price hasn’t changed significantly, and it remains one of the cheapest areas in the UK with an average per month rent of almost 600 GBP in 2012. However, London has indicated huge growth.
The price of rent has gone up from $1300 in 2006 to almost $2700 in 2012. This upward trend of rent in London influences the demand for the housing market to shift rightward. As an illustration, if the price of rent goes up, it gives people the incentive to invest in the housing market and save the rent amount indirectly in property by making monthly installments. In addition, renting a house is considered a substitute for purchasing one. So, if the price of a substitute product goes up (which is the case in London), the demand for the product increases. As a result, by keeping all other factors constant, the demand for houses in London has to increase if the price of renting a house has increased.
Population: The UK is heavily populated compared to most other regions. Additionally, population density is recorded as very high in Britain. Within the UK, the population is distributed unequally. England constitutes almost 84% of the overall UK population, while Wales, Scotland, and Northern Ireland constitute very minor percentages.
The above chart clearly shows that the population of the UK has raised by almost 3 million since 2006. England has the highest population in the UK, and within England, London is the most densely populated region. According to the ONS, London has by far the highest population density than any other English region, with an average of 4,800 people living in each square kilometre.
According to the above diagram, London is much higher ranked in its population density. In 2010, only 257 people were living per square kilometer on average in the UK. However, this figure is much higher compared to other European countries, but in comparison to London, this seems to be very low. There is a direct relationship between population and demand for houses. On the other hand, population density causes extreme demand pressure on the housing market, and as a result of that, demand for houses in London shifts rightward. This indicates that the more population growth, the more demand there will be for houses.
Household Income: Changes in both the intensity of national income and its allocation can have a considerable impact on the demand for houses and property. As houses are regarded as normal goods with a high income elasticity of demand, raises in income can generate a larger percentage raise in demand. As their income increases, most people switch from renting to homeownership or shift to larger properties. Some may acquire a second property as holiday homes or to rent out. As a result, the demand curve for houses will shift to the right as incomes rise.
According to the Office for National Statistics, average household income has been continuously rising in the last few years. In 2011, the average gross annual income for full-time employees was £26,244, which was an increase of 1.4% from 2010. Almost all regions in the UK experienced slight growth in terms of household income. London remained one of the regions with the highest average annual household income. In 2011, the average individual earnings were £26,000, while the average income for working-age households was around £33,000. As the income of households has increased by some portion since 2006, it is expected that the demand curve for houses will shift to the right.
Future Price Expectation: There is a vital speculative factor in the demand for the housing market. The demand for a property or house by developers and ordinary householders is often set by speculation and future price expectation. Rising house prices encourage speculation, and falling house prices discourage speculation, resulting in an increase and decrease in demand. It is estimated that the average house price in the UK will reach £330,000 by the year 2025.
Based on the current house price provided in the above chart, housing prices in the UK have shown an upward trend. This clearly boosts people’s speculation and demand. As an illustration, an upward trend enhances customer speculation. In addition, from a speculative point of view, people are more likely to buy a house as the house prices go up. This is because people think they could sell their property back at a higher price in the future if they make an investment now.
However, during a recession period, as the prices were dropping, people were losing interest in investing in the property market, thus the demand decreased. According to a report published in 2005, the average house price in the UK will reach £330,000 in the year 2025. All in all, UK future house price expectations clearly trigger demand in the market and shift the demand curve toward the right side.
Supply of Houses in the UK and London
Price of the House: The supply of houses is basically determined by house prices along with a number of non-price determinants. In terms of house prices, there is a positive relationship between price and supply of houses. The higher the price, the more will be the supply of houses in the market. A higher price encourages house builders to build more houses and at the same time, enhances owners to sell their houses for more profit. In the UK, despite the recession, the average price of houses has steadily risen.
The price of houses in Northern Ireland has been decreasing since 2007, resulting in a decrease in the supply of houses in Northern Ireland. However, London house prices increased dramatically from 300,000 to almost 400,000 GBP in 2012, despite some downturn during the recession. Overall, keeping other factors constant, the supply of houses has increased in London. This increment has been shown in a movement in the supply curve in the upcoming diagram.
Availability and Price of Land: Availability greatly influences the supply of a particular good. Similarly, as indicated, the building of new dwellings commonly relies upon the availability of land, which is very limited in the short run. An increase in the availability of land will shift the supply curve to the right. The availability of labor is also another major factor.
For example, a shortage of bricklayers would consequently reduce the supply of new houses in London. In addition, the price of land is also regarded as an important factor in the supply of houses. An increase in the price of land will result in a decrease in the supply of houses. However, as shown in the following diagram, the building land price has fallen heavily during the recession period. The reduction of land prices in England and Wales will increase the supply of houses and shift the supply curve to the right.
On the other hand, the overall housing capacity of London for net further houses between 2011 and 2021 has been forecasted at 360,062 net, with a 90% decrease for garden land. If the garden is not deducted, the figure reduces to 37,000 (SHLAA/HCS, 2009).
However, East London will have the highest capacity of land by accommodating 157,841 new houses (with a percentage share of 42.6%) in the next 10 years. In comparison to other subregions of London, the supply of houses in East London will increase, and as a result, it will shift to the right side. This shift is mainly due to a higher percentage availability and a reduction in price since the recession.
Future Price Expectation: There is an important speculative factor in the supply for the housing market. The supply of a property or house by developers and ordinary householders is often determined by speculation and future price expectation. Rising house prices tend to decrease supply in the short run. However, a continuous decrease in prices suggests that prices will continue to fall, thus encouraging supply in the short run. Based on a report, it is estimated that the average house price in the UK will reach £330,000 by the year 2025. This future price expectation pushes supply down in today’s housing market.
By considering the above trend, Northern Ireland is experiencing a downward slope, while the opposite is true for London. People who observe the trend realize that the price of houses in London will continue to rise in the future. Therefore, the expectation of future prices in London causes the supply to shift to the left, as suppliers attempt to sell houses at higher prices in the future.
However, in Northern Ireland, due to many reasons, the price of houses has been falling since 2007. This reduction trend, from a speculative point of view, increases supply in today’s market. As a result, from a future expectation point of view, as shown in the coming diagram, the supply of houses in London will decrease, resulting in a leftward shift of the supply curve. Conversely, the supply of houses in Northern Ireland will increase in the current condition, as people estimate that the price of houses will go down further. Therefore, the supply curve will shift rightward in Northern Ireland.
Government Policies Affecting the Housing Market
Availability of Mortgages: Mortgage availability dramatically enhances the demand and supply of houses. It is basically the role of the bank in supporting people to buy a house. During the period of recession, a shortage of liquidity in the banking system arose, resulting in mortgages becoming more expensive and harder to obtain. As people defaulted on mortgages, the price of houses, which was booming before the credit crunch, started to decline. The fall in house prices during the recession meant a loss for banks because the resale price of the dwelling was far behind the initial mortgage.
In addition, due to bad occurrences with mortgage companies going bankrupt, financial institutions became much more careful about supplying money for mortgages. Also, since they had lost money, they couldn’t manage to lend more. Consequently, mortgage finance was in short supply, causing banks to require huge deposits and raise interest rates. It is known that due to the shortage of mortgage funds, the demand for houses will fall and therefore, house prices will experience a bit more decline until the recession is fully covered. Interestingly, the Bank of England, in order to keep the housing market stable, has extended its emergency lending to the banking system.
The above graph shows that the average deposit required to buy a house has sharply increased from 10% in 2007 to almost 25% in 2012. This huge deposit makes houses less affordable. Therefore, due to the availability of fewer mortgages, high deposit requirements, and credit crunch, the demand for houses will fall and shift to the left.
Interest Rate: The interest rate is set by the government, and it directly affects the housing market. A change in the interest rate also affects the amount of money to be paid by those who are on variable rate mortgages. Higher interest rates make houses less affordable, and thus the demand curve will shift to the left.
Based on the above trend, interest rates in the UK have been low in recent years, stacked at 0.5%, which has made houses more affordable and reinforced demand. Rates started to drop significantly in late 2008, reaching their lowest level on record. However, mortgage rates did not decline so considerably as lenders tried to maintain their liquidity and increase their profitability. Since many borrowers were on fixed-rate mortgages, not all of them could take advantage of low interest rates. As a result, a drop in interest rates makes mortgages more affordable for buyers to purchase houses, increasing demand and pushing the demand curve to the right.
Government Legislation and Stamp Duty
Legislation can also influence the housing market in a number of ways. The strict necessity for planning permission for new property building may discourage house builders. In contrast, relaxation of government regulations, as happened in London, is likely to encourage building and reinforce supply. The government can also impose restrictions on building in rural areas, such as green belts. More recently, the UK government introduced Home Information Packs (HIPS) to accelerate the house buying and selling process. Nevertheless, some argue that it has added a new layer of government bureaucracy to an already over-regulated market.
Conclusion
The house market is considered an important factor in a country’s economy. The demand and supply of houses in the UK are basically determined by the price of the house, availability of mortgages, income, cost of rent, and future price expectations. Among the mentioned factors, mortgage availability was regarded as a vital factor that affected the housing market dramatically since 2006.
Before the recession, people had much access to loans and credit. However, this accessibility to mortgages has dramatically declined during the recession period from 2007-2009. It is obvious that buying a house requires a huge investment. People cannot afford to buy a house without the assistance of a financial institution or bank. People are required to pay much more in deposits to buy a house. In addition, the UK interest rate has reached its minimum ever (0.5%) in the last few years.
This reduction in interest rates did not affect those people who were on fixed-rate mortgages. Income is another significant factor in the housing market. Despite income having increased in the UK since 2006, the contribution of this factor in the housing market was not significant. Although income has increased, the banks’ mortgage advancement to income ratio has dropped sharply. This means the bank has decreased their advances, and people, despite earning quite a bit more income, still do not have access to as much advance as they had in the past. Population is the third important factor that increases the demand for a house.
The UK population has gone up significantly. Population growth and density in London play an important role in the demand for houses in London. On the other hand, London is known as one of the best cities to live and work in. Therefore, it has grabbed the attention of more foreigners. The contribution of foreigners in the London housing market is one of the factors which results in a huge price boom.
References
- Barrow, Mandy. Project Britain, Britain Life and Culture. Retrieved from: http://www.woodlands-junior.kent.sch.uk/customs/questions/population.html
- Central Intelligence Agency. The World FactBook. United Kingdom. Retrieved from: https://www.cia.gov/library/publications/the-world-factbook/geos/uk.html
- Economics Online. The Housing Market. Retrieved from: http://www.economicsonline.co.uk/Competitive_markets/The_housing_market.html
- Greater London Authority. (Quarter 2, 2012). London Housing Market Report. Retrieved from: http://www.london.gov.uk/sites/default/files/2012.08.16%20Housing%20market%20report%20Q2%202012.pdf
- Greater London Authority. (2009) The London Strategic Housing Land Availability Assessment and Housing Capacity Study. Retrieved from: http://www.london.gov.uk/shaping-london/london-plan/docs/strategic-housing-land-study-09.pdf
- Index Mundi. Retrieved from: http://www.indexmundi.com/g/g.aspx?v=21000&c=uk&l=en
- Office for National Statistics. (2012). House Price Index, July 2012. Retrieved from: http://www.ons.gov.uk/ons/dcp171778_278360.pdf
- Office for National Statistics. Retrieved from: http://www.ons.gov.uk/ons/datasets-and-tables/index.html?pageSize=50&sortBy=none&sortDirection=none&newquery=house+price+index&content-type=Reference+table&content-type=Dataset
- Maunder, Peter, Danny Myers, Wall Nancy, and Roger Leroy Miller. (1995) In Economics Explained Third Edition. Callins Educational.
- Residential Rental Price Index. Retrieved from: http://www.rentright.co.uk/00_00_00_00_1_rrpi.aspx
- Valuation Office Agency. Property Market Report 2011, The Annual guide to the property market across England, Wales and Scotland. Pp 11-13
