UK HOUSING MARKET

UK Housing Market

UK Housing Market

Introduction

The performance of the UK's housing market has attracted much attention in recent years, largely because of its high degree of price and transaction volatility and their impact on the macro economy. It is a working assumption of this article that housing market volatility has been undesirable because of its economic and social consequences outlined in this literature(Schiller 2007 pp.1a-1c). Much of the debate on the future of the owner-occupied sector focuses on demand-side factors, such as future patterns of household formation and the development of a more flexible labour market.

Discussion

Historical analysis

The Credit Crunch has been hitting the UK Mortgage Sector hard as many easy credit mortgage deals have been removed from the high street shelves in recent weeks. Despite central bank actions to ease financing terms and increase liquidity, this does not address the real issues of illiquid mortgage related bonds and expectations that the UK Housing Market will slump on the back of a surge in foreclosures(Centre for Cities, 2008).

The first signs of the housing market moving towards an imminent peak occurred in February 2007 following clear evidence that the subprime mortgages were defaulting in ever greater numbers in the United States. The assumption here was that this could lead to an unraveling of the carry trade, which would lead to deleveraging of the credit boom. However the initial financial markets wobble of February 2007 failed to show outward evidence of a credit crunch. Thus the UK housing market continued to rise despite rising interest rates that had been forecast in November 2006 to rise to a peak of 5.75% by September 2007 as the Bank of England would battle with inflation during 2007(Meen, Andrew, 2008, pp.7-9).

The housing market took off into what would be its final spike higher with many commentators declaring at the time a new paradigm, with many reasons put forward as to why house prices could be supported indefinitely(Said, 2009, pp.78-81).

UK Housing Market 2008 Crash Trigger

Following the peak in UK house prices, the initial trend was in line with the original forecast. However it was recognised following Northern Rock's bust that the pace of deterioration of credit markets as well as the capital gains tax changes implied that the UK housing market's rate of decent would start to accelerate from April 2008 and could be termed as a housing market crash. As I wrote in November 2007 - Crash in UK House Prices Forecast for April 2008 As Buy to Let Investors Sell(Centre for Cities, 2008):

The timing for the sharp drop is likely to coincide with Labour's change on capital gains tax which effectively cuts the tax payable on gains accumulated over the last few years to 18% from 40%. This tax change comes into force on 1st of April 2008 and thus the expectation is for an avalanche of selling amongst buy to let investors to lock in profits.

This also means that the market will to some degree be artificially supported going into April ...