Housing Economy

Housing Economy

Introduction

The housing market of UK has boomed in the past few years, prices have risen much quicker than the incomes generated by households. In this study, we will discuss what policies will be less unstable in the future. The demand and supply have not been constant at all since the past 20 years. In this study we will know the reasons of why this happens and what does the government do to stabilize the economy?

Current Housing Trends

The UK housing economy crashed dramatically in the 1990s (Goodman, J.L. Jr. & Ittner, J.B. 1992). Since then it has been able to achieve a remarkable recovery. The average housing prices are around 163000 pounds. The prices have surpassed the 1989 peak, relative to average incomes of households (Green, R.K. & Hendershott, P.H., 2002). However, affordability measures and interest payment ratios to income are not so over stretched. Because of these policies, the Great Britain managed to weather the economic slowdown of the world in 2001 to 2003 much better if compared to other countries. It attained a growth of 6% and was beaten by Canada only. But this cannot explain the factors of the price boom of houses. Many economists think there is a bubble in the Britain housing market which is very common with a few other countries as well. These countries include Australia, Spain, Sweden, Canada and a few parts of the United States of America. Land use planning also is another reason for the decrease of job growth in the past (Vermeulen and Van Ommeren, 2008). This has led to a decrease in the household incomes, which further decreases the demand for houses.

The above figure shows the average house prices to average earnings ratio. This shows the level of affordability for Great Britain and 4 major regions. We can clearly see a shocking rise since 1999 (Green, R.K. & Vandell, K.D. 1999). However, in the recent times, the housing market has considerably slowed. From June 2004-April 2005, prices rose by just 1.3% over the period of nine months. A lack of demand of first buyers with lower number of sales of houses and lower mortgage application rates has been witnessed in the recent times as well.

Nature

Houses take time to be constructed so when there is an increase in demand, the supply takes time to meet it. Houses are considered as assets which pays implicit incomes. Implicit income is the rent that is saved by owning houses by the owner. Thus, the value of houses must portray the future expected rents. Since, house ownership is spread widely in UK, it is considered as an asset by the people owning it. And since the prices can differ considerably, owners get exposed to a lot of risk. It is impossible to offset these risks as none of the owners get insurance against a decreases in the price level. In different countries, the determinants of house process and volatility are different. For examples: short term interest rates are not considered to ...