INTRODUCTION:
The housing market is important as it has the strong impact on financial system, which affects the capital availability, which finally affects the real estate markets. Experts say that a booming housing market gives people confidence and encourages spending. If value of houses keep on increasing the house owners are more likely to spend. People will also need more consumers durable if they are moving or buying homes, eg. Washing machines, wardrobes, carpets, etc. So, this clearly gives idea why housing market is important for the country. (why the national housing market is so important-
http://knakalstreetwise.wordpress.com/2009/04/08/why-the-national-housing-market-is-so-important )
This study mainly focuses on U.K. housing market. I am going through the important factors that had an impact on housing prices, the reason why house prices fall. Sometimes, even in this period of falling price or low price the demand for house is too low. Reasons for this decline in demand are also included in this study. It also includes the house prices in last 2 years and also future expectations about housing market.
Demand:
Demand is defined as the quantity of a good or service that customers are willing and able to purchase during a specified period under a given set of economic conditions.
Law of demand:
�Other conditions remaining same, as the price of a product increases, the demand for that particular product decreases.”
(Managerial economics by Mark Hirschey)
Factors affecting demand of a product:
1) Price of a product:as the price of the product increases, the demand for that product decreases. It means there is a inverse relationship between price of a product and quantity demanded.
2) Price of other products: As the price of the substitute goes up, the demand for the main product goes down. And as there is an increase in price of compliment product, there will be decrease in the demand of the main product.
3) Income of people: If the income of the people increases, they are willing to buy a normal product or good product, so demand for that product increase, but the demand for the inferior product decreases.
4) Population of the area: As more or fewer consumer the market, the demand for the product goes up.
5) Preferences: There are so many kinds of things that can change one’s tastes or preferences. So if the conditions are in favor of the product, the demand of the product will increase.
6) Future price expectations: If people come to know that the price of the product will go up tomorrow, they will buy the product today. It means the demand will increase, as the future price seems higher than today.
(http://www.econport.org/content/handbook/Demand/Factors.html )
Supply:
�Supply is the quantity of a product that a producer is willing and able to supply in the market at a given price in a given time period.”
(http://tutor2u.net/economics/revision-notes/as-markets-supply.html )
Law of supply:
�Other conditions remaining equal, as the price of goods or service increases, the quantity of goods or services provided by the supplier increases and vice versa.”
Factors affecting supply:
1) Price of the product:
2) The price of other products:
3) Prices of factor of production used to produce the products:
4) Technology
5) Number of producers:
6) Future price expectations:
U.K. HOUSING MARKET:
�In the free market house prices are determined by supply and demand. With an increase in demand prices will rise. With a fall in demand prices will fall. Demand and supply conditions can be very different between regions, causing major differences in house prices. Also over time conditions can change (e.g. in a boom demand is likely to rise) and this leads to fluctuations .Because houses are the major item of expenditure for most people in their lives and their main assets such changes are very significant in terms of their impact of their income and wealth.”
(Andrew Gillespie, Advanced Economics Through Diagrams 2001)
Haris Beider discusses about changing demand in housing. He mentions about a number of micro-level (neighbourhood) and macro-level (regional and national) impacts that have an influence on whether an area will experience low or changing demand.
(Harris Beider, Neighbourhood Renewals & Housing Markets 2007).
THE MAIN FACTORS AFFECTING HOUSE-PRICES:
Demand side factors:
1) Interest rate:
Interest rates affect the cost of paying for a mortgage. It is very important as mortgage payment is generally the biggest part of a landlord’s monthly spending. In the UK, the majority of the landlords have a variable mortgage which means there will be rise in cost of mortgage if the interest rates go up. (http://www.uk-houseprices.co.uk/housing_market/factors_affecting_prices.html)
Bank of England set the base for the whole economy in the UK. Increase in interest rates will cause a rise in cost of mortgage repayments and this may force people to sell and discourages buying. In 1992, there was a fall in demand for housing and finally house price fell as the interest rates were over 12%. Goeff Riley mentions about the impact rising interest rates on demand for housing. He states that it causes a fall in demand. (Geoff Riley , Housing Market Economics 2005, Published by Tutor2u ltd)
2) Market sentiment/ expectation:
This is something related with human psychology. If people observe that the house prices are rising, they expect a further rise in the prices and will be tempted to buy a house. When this is a case, the confidence in the market is high and mortgages will be available with small deposits. From 2001-2007, 100% mortgages were quite common. Housing market was at a boom. But now, there is a different case. House prices are falling on a daily basis and confidence in the market is very low. But now, banks are not lending mortgages without a big deposit. (marketoracle.co.uk) Peter Williams and Hoffman has mentioned about market expectation. He states that �optimistic price expectation may result in rising prices and rising demand”
(Peter Williams & AE Holmans, Directions in Housing Policy: Towards Sustainable Housing Policies for the UK 1997)
3) Economic growth/ unemployment:
If the income of the population increases, they spend more money on buying a house. Traditionally, there is a ratio of mortgage 3 times of the salary of people. Therefore, rising income enable house prices go up. However, the ratio of house prices to income can vary considerably. If the income goes into a recession and unemployment rises. The demand for buying houses would fall significantly. (http://www.uk-houseprices.co.uk/housing_market/factors_affecting_prices.html)
4) Mortgage availability:
The period of 2003-2007 saw a housing boom and the banks gave 100% mortgages and self certification mortgages. Thus, there was a increase in people who was able to buy. Johnston Birchall discusses the change in house prices and mortgages advance ratio. He told that the increase in proportion of mortgage rises as a result of higher house prices. (Johnston Birchall, Housing Policy in the 1990’s 1992)
Credit crunch is also the factor that is having effect on housing market, which refers to a sudden shortage of funds for lending, which results in a decline in loans available. Credit crunch can occur for many reasons:
� Direct money control by the government leads to credit crunch.
� If there is sudden rise in interest rate, it will affect the loans available.
� If there is a drying up of funds in capital market, then also there is a chance of credit crunch.
In UK, mortgage lenders did not lend so many wrong mortgages. Even though mortgage lending became more flexible in last few years; it still had good control in place than in the US. However, it caused very serious problems in Northern Rock, which had high percentage of risky loans, but also had the highest percentage of loans financed by capital markets.
(http://www.mortgageguideuk.co.uk/blog/debt/credit-crunch-explained/)
5) Government policies:
6) Consumer confidence:
7) Demographic factors:
8) Speculation:
9) Inherited wealth:
Supply side factors:
a) http://www.uk-houseprices.co.uk/housing_market/factors_affecting_prices.html