Download UK house price inflation

The UK Housing Market
Is it actually working?
AS
AQA
Edexcel
OCR
1 Markets and market failure
Markets – how they work
The market system
2 The national economy
Markets – why they fail
Market failure and
government intervention
3 Markets at work
Managing the economy
The national and
international economy
A2
AQA
1 Working as an economist
2
Business economics and
the distribution of income
Government policy, the
3 national and international
economies
Edexcel
OCR
Two from
a. Economics of work
and leisure
b. Transport economics
a. Labour economics: or
c. Economics of
Development
b. Development economics
d. The UK economy
Industrial economics
The UK in the global
economy
Economics in a European
context
UK house price inflation
Percentage annual house price increase (adjusted quarterly).
(annual percentage rates, adjusted quarterly)
35
30
25
20
15
10
5
0
-5
-10
1984 1986 1988 1990
1992 1994 1996
Source: based on Halifax House Price Index (HBOS)
1998 2000 2002 2004
2006
UK house price inflation
Percentage annual house price increase (adjusted quarterly).
(annual percentage rates, adjusted quarterly)
35
30
25
20
15
10
5
0
-5
-10
1984 1986 1988 1990
1992 1994 1996
Source: based on Halifax House Price Index (HBOS)
1998 2000 2002 2004
2006
UK house price inflation
Percentage annual house price increase (adjusted quarterly).
(annual percentage rates, adjusted quarterly)
35
30
25
20
15
10
5
0
-5
-10
1984 1986 1988 1990
1992 1994 1996
Source: based on Halifax House Price Index (HBOS)
1998 2000 2002 2004
2006
UK house price inflation
Percentage annual house price increase (adjusted quarterly).
(annual percentage rates, adjusted quarterly)
35
30
25
20
15
10
5
0
-5
-10
1984 1986 1988 1990
1992 1994 1996
Source: based on Halifax House Price Index (HBOS)
1998 2000 2002 2004
2006
Who benefit from rising house prices?
• The losers
– The first-time buyer
– Those upscaling
• The gainers
– Downsizers
– Elderly going into homes
– Emigrants
• Those largely unaffected
– Those not moving
– Those moving to another area
where house prices are similar
Causes of rising house prices
• Equilibrium in the housing market
– Where supply of houses equals demand
• Many different segments of the market
– Price changes caused by shifts in D and/or S
• D and/or S  P
• D and/or S  P
• Problem of inelasticity of supply
Supply curves with different price elasticity of supply
P
S2
P2
S1
P1
P0
D1
D0
O
Q0
Q2
Q1
Q
Causes of rising house prices
• Equilibrium in the housing market
– Where supply of houses equals demand
• Many different segments of the market
– Price changes caused by shifts in D and/or S
• D and/or S  P
• D and/or S  P
• Problem of inelasticity of supply
– Some lags in price adjustment
• Especially when markets are turning
• Currently there is a glut of properties, especially flats,
because sellers are reluctant to reduce prices
Causes of rising house prices
• Shifts in demand: short-term causes
– Incomes
• Current and expected
– Interest rates
• Current and expected
10
30
9
25
8
20
7
15
6
10
5
5
4
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
House price inflation % (adjusted quartelry)
Mortgage interest rate %
Halifax variable mortgage rate
Causes of rising house prices
• Shifts in demand: short-term causes
– Incomes
• Current and expected
– Interest rates
• Current and expected
– Availability of mortgages
• Credit rating of applicants
• Multiple of income
Ratio of average house prices to average earnings
25
20
5
15
4
10
£000s
3
5
2
0
1
-5
0
-10
1983
1987
1991
Source: based on Halifax House Price Index (HBOS)
1995
1999
2003
2007
Annual house price inflation
Average house prices / average earnings
6
Ratio of average house prices to average earnings
25
20
5
15
4
10
£000s
3
5
2
0
1
-5
0
-10
1983
1987
1991
Source: based on Halifax House Price Index (HBOS)
1995
1999
2003
2007
Annual house price inflation
Average house prices / average earnings
6
Ratio of average house prices to average earnings
25
20
5
15
4
10
£000s
3
5
2
0
1
-5
0
-10
1983
1987
1991
Source: based on Halifax House Price Index (HBOS)
1995
1999
2003
2007
Annual house price inflation
Average house prices / average earnings
6
Ratio of average house prices to average earnings
25
20
5
15
4
10
£000s
3
5
2
0
1
-5
0
-10
1983
1987
1991
Source: based on Halifax House Price Index (HBOS)
1995
1999
2003
2007
Annual house price inflation
Average house prices / average earnings
6
Causes of rising house prices
• Shifts in demand: short-term causes
– Incomes
• Current and expected
– Interest rates
• Current and expected
– Availability of mortgages
• Credit rating of applicants
• Multiple of income
– Rents (rental property is a substitute good)
– Taxation: stamp duty
– Speculation about future house prices
Speculation compounding a price rise
P
Assume an initial
rise in demand
b
P2
P1
S1
People believe
that the rise in
price to P2
signifies a trend.
a
D1
O
D2
Q
Speculation compounding a price rise
P
S2
S1
P3
c
P2
b
P1
The rise in price
The effects
ofbuy
Sellers
hold to
back,
Buyers
rush
to P2 is
these
shifts
is a
waiting
for prices
now
before
prices
compounded by
priceany
to P
torise
rise.
rise
further.
speculation 3
a
D3
D1
O
D2
Q
Mortgage Advances for Buy-to-let Properties
40000
35000
30000
25000
20000
15000
10000
5000
0
1999
2000
2001
2002
2003
2004
2005
2006
Causes of rising house prices
• Shifts in demand: long-term causes
– Population growth
– Population distribution
• Family size
• Regional trends
• Income distribution
Causes of rising house prices
• Shifts in supply: short-term causes
– Speculation
– Rents (letting property is
a substitute)
• Shifts in supply: long-term causes
– House building
• Costs
• Availability of land
• Planning regulations
What will happen to
House Prices?
Is there going to be a crash?
What will happen to house prices?
• Short-term: probably fall
– Credit crunch
– Buy-to-let is now much less profitable
• In many cases rents do not cover the mortgage interest
– Renting is now relatively more affordable
– Speculation
– Interest rates: actual and expected
• Problem of inflation
– Flats fall more than houses
Inflation rates for (a) flats and
(b) semi-detached houses
Average house prices / average earnings
45
40
(a)
35
(b)
30
25
20
15
10
5
0
-5
-10
-15
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006
Source: based on Halifax House Price Index (HBOS)
What will happen to house prices?
• Short-term: probably fall
–
–
–
–
–
–
–
Credit crunch
Buy-to-let is now much less profitable
Renting is now relatively more affordable
Speculation
Interest rates: actual and expected
Flats fall more than houses
North fall more than the south
Quarterly inflation rates for (a) the north and
(b) the south east
Average house prices / average earnings
15
(a)
10
(b)
5
0
-5
2002
2003
2004
Source: based on Halifax House Price Index (HBOS)
2005
2006
2007
What will happen to house prices?
• Short-term: probably fall
–
–
–
–
–
–
–
Credit crunch
Buy-to-let is now much less profitable
Renting is now relatively more affordable
Speculation
Interest rates: actual and expected
Flats fall more than houses
North fall more than the south
• Long-term: probably rise
– Demand will probably outstrip supply
What can the government do?
• Demand
– Making house ownership more
affordable
• Tax relief
• Schemes for mortgage sharing
– But ultimately increases demand
• Supply
What can the government do?
• Demand
– Making house ownership more
affordable
• Tax relief
• Schemes for mortgage sharing
– But ultimately increases demand
• Supply
– Relaxing planning regulations
– Public housing
You can find these
PowerPoint slides on
www.economicsnetwork.ac.uk/archive/
A-level_Dec07