In this globalized world the economy has seen a lot of up and downstream and its growth is very slow. As the country economy is affected then the whole world economy is affected. Globally there are a lot of socio and economic changes which affects the world's economy. USA has the strong economy and if the American economy changes the whole world suffers due to this. The very big example of this can be interpreted by the housing bubble burst. Due to the impact of housing bubble in America many banks, financial institutions were on the verge of bankruptcy. This big change in the economy was suffered and felt in the whole world and in every sector of the business. In this report it is mentioned that what were the circumstances under which the global economy was affected and the why the housing bubble burst. The analysis of housing sector becomes very necessary to understand the causes behind the burst and recession caused by it. And the many countries in the world dependent upon the USA economy directly and indirectly due to which they were also in great danger. There are different data and sources through which we can find out the main reason of bubble burst and economic crash. This study would help us in getting the prices of real states in the different countries and how much variation occurs before and after.
After knowing above then we can predict the demand and forecast the supply and also can know the factors which are responsible for the hike in price of land. As there are a lot of reasons tfor which housing prices were affected. These factors will help us in solving the problem and also to understand the trend of the economy and future market.
Demand and supply for housing
UK housing deal can be done in two types of transaction
(a) seller's price agreed by buyer
(b) Real price paid by the buyer
In UK seller have the right to deny or accept the proposal from the buyer for a land
How seller operates in the Market
Power always remains in the hands of seller if the demand increases for a land in the seller's area and no land is left with best quality then automatically power come into the hands of seller this is called market shifting. Seller know that there is scarcity of land so any how it has to be sold out so he make the hold on its own price whether buyer willing to buy it or not.
How buyers operates in the Market
As we have seen in the above case vice-versa is in the case of buyer as if there are huge land and consumption is very less then market shifts towards buyer and power comes to the buyer and it becomes his wish whether to buy or not this is how in both cases shifting of market takes place.
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As the demand increase due to the scarcity of land or population increases or purchasing power of the people then a force exerts upward and prices of the land increases in the market.
Due to the time lag between price change and land supply in the market remains inelastic. Market price increase because of inelastic supply and shifting of demand takes place.
Due to the inelastic supply demand automatically shifted towards out which means that expansion of houses which are traded takes place.
If there is elastic supply the demand condition doesn't change and a pressure exerts down to the price and there needed a balance between the quantities of houses sold and bought.
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Some of the factors responsible for the demand of housing
Hike in income - due to the increment in income the UK people's purchasing power was increased which in turn was responsible for increase in demand of houses as living standard in UK was increased and everybody wants to move up in the market. (Robert J. Shiller, 2005)
Confidence of the People - when people lost their faith and confidence in the economy and predict that it is going to be down then their search for a new home finishes and they sign the contract with the current condition. Similarly when they forecast about the development of the economy and show the confidence their hunger for a new house increase which in turn increases the demand of the house and power balance remains in the equilibrium. (Shanker M. , 2003)
Employment- this is the big factor responsible for the demand as if there are more jobs the confidence of the consumer increase which enables them to buy more whereas if there will be less or no job then there will be no income and no confidence which will directly impact to the housing economy and demand will decreased.
Demographics-increase in divorce, immigration of the people from other parts of the country intervenes in the demand for housing. (Barker Review of House building Supply- March 2004)
The above factors are the most important factors which are responsible for the up and down of the housing prices if these factors are up then demand will increase if they are down the demand will decrease so demand is directly proportional to these three factors
Down of the price of housing in UK
When we see the above figure we can interpret that UK housing prices were down what were the reasons behind this (Eric Tyson, 2003)
Credit policy was very hard which led to getting mortgage very impossible
Income to house price ratio was low so consumer can't afford it
Less number of jobs and downsizing of economy
When the house prices were low no one bought the land
There are very simple eleven reasons which suggest about the downsizing of economy and housing price in UK
1. Hard Mortgage policy
One of the great reasons for demand fall of housing in UK is very low availability of mortgage finance. According to its council this is the worst condition since 1991 that approvals for a mortgage is very low. Seeing in the past around July 2007 mortgage leaders were very soft hearted and put many offers to make a customer and offer them various types of schemes like 100% mortgage. But the money crisis in the banks resulted in the reduction of mortgage lending. However, the credit crisis has led to banks struggling to raise finance; therefore they have had to reduce their mortgage lending.
2. Ratio of Income to House price decreases abruptly
In the current scenario the income to house price ratio in UK is around ½ that is 50% which is to be overcome (1975-2005) Source : Economist (1) It means that money crisis causes in getting mortgage easily.http://www.economicshelp.org/uploaded_images/PriceIncome-ratio-500-780228.jpg
3. First Time Buyers were not able to manage housing prices.
The situation was getting worse for first time buyers to have the land as the income to house ratio was very low and housing prices was touching the sky but earlier this problem was handled by banks as they were offering 100% mortgages and interest also one of the financial institution Abbey national give the money which was 5 times of the salary of a borrower but the crisis caused by money makes the situation very difficult for first time buyer. (R. Burdett, 2004)
4. Supply was limited but still fall of House Prices
If anyone has the myth that house prices can't go down its worth to read a case study of Japan. As Japan also faced a similar problem in 1980 when house prices was booming but unfortunately for the next consecutive 14 years the prices were down which resulted in slow down the economy and low demand. USA faced the downfall of economy and housing prices when they were at the top in 2007.
5. UK market sees speculation
The housing market is not only a investment there is some sentiments attached with the house as it gives you space where you live so one can't assume speculation to be the reason of house prices downfall as happens in stock market. As there is huge demand for housing for the investors as they want to hold the property for future but now when the Prices are going down speculators are going away from the market which resulted in lowering of demand. (Eric Tyson, 2003)Economy and Housing Market 2010
6. What is Herding Effect
Herding behavior dominates the market (Research paper by Alex Hamilton). So before doing forecasting it can be inferred that economic fundamental are secondary thing primary is market sentiments for the rise in demand. Now the condition is that people are less confident in buying due to the market sentiments. There was paper in UK mentioned about house prices that 15% of prices were reflected in froth as well as speculation rather being in economic principles.
7. UK Housing Market liable to change (volatility).
There are many supply constrains by which housing stock of the UK got affected. As new houses are not building in large this forecasts the demand and price increment. As very small change in demand will let to the rise in prices as in 1991 there was a downfall in demand which led to price fall significantly. (Barker Review of House building Supply- March 2004)
8. Interest Rates in UK
Interest rates in UK are rising and it's a record in UK and consumers are borrowing and taking mortgages and credit at a good interest. Around £1.168 trillion is in debt Source (3). This shows that a small change in interest rate can put dwell effect on the consumer buying behavior and spending and make them confident to do purchasing. So we can predict that house market prices are directly proportional to the interest rates whether there is small rise in rate of bank. Still it is difficult for many homeowners to surpass the rates as Bank of England is offering them a good interest rate but they feel that the rate of mortgage is high. There are much more other than this like oil prices, food and beverages also electricity which makes cost of living very high for a common man.http://www.economicshelp.org/uploaded_images/uk-ir-base-variable-fixed-758628.jpg
9. Forecasting of UK House Prices.
According to the market analysts and great economists future prediction says the downfall of house price as Mr Calverley, explain it in his book, (Bubbles and how to survive them) he believe that there will be 50% downfall in prices of UK House Prices 2009
The house similarly the same prediction is done by Gordon Brown David who was a former advisor he thinks of speculation in housing demand. Whereas David miles explains about the change in price inflation of the house by 1/3 to 1/2 which is liable to change according to speculation.
10. Collapsing of mortgages due to sub-prime crisis
Investors in US have lost their confidence in the housing market due to the change in demand and housing prices so in US a question arises how to sell mortgage as debt because nobody is showing interest in it and bank are suffering a lot by becoming more and more conservative. The crisis led to the less selling of mortgage in US in the form of debt.
11. Consumer confidence suffer by Northern Rock
The Northern Rock and HBOS have adverse effect on the consumers and due to the unease and discomfort in the mortgage consumers are no enthusiastic to invest in housing. Though the housing prices are decreasing so that the market condition can be smooth but prior to that it has been very bad because of the scarcity of mortgage finance.
Analysis of price change
It was June 2007 after which nobody has seen the double figure in house prices but in April 2010 the scene was clear.
UK market in 2007 and in April 2010 can be seen in the following figure
According to business analysts and economists the change in mortgage market was different 3 years ago.
Earlier the lenders don't get worried by knowing the income of the borrower and lend him the money but now only 95% mortgage is available which is loan-loan and only 90% mortgage can be seen in return.
One analyst says that in the early 2007 there was house on sale and automatically ten persons started putting bid on it but now the condition is different though the selling price is according to the situation. Now the people are taking house only who really need it or someone who wants to maintain his lifestyle. Compared to earlier the prices goes down up to 5-10% and the sale is down.
House price inflation
Graph of house price inflation from 1995
Future predictions and forecast:
Mortgage lending causes the downfall in housing demand and it becomes very difficult for first time buyers to get a mortgage and now a big question arise that when mortgage crisis will finish as bank of England is putting great effort and offered a huge amount that is £50bn to government. Some of the economists thinks that the situation will get more worse before recovering as the sub-prime has not been completely removed. If the bank will agree to fund the mortgage then the problem of lending can be solved and market can be smooth again. (John R. Talbott ,2003).
This is to be predicted that housing prices in UK will increase further to £300,000 in the next decade but the sources says it was 1992 when the prices have fallen approximate to 15% and they are assumed to be increase at 200% by coming decade.
(Robert J. Shiller , 2005)
Conclusion
Here we have studied about the UK housing prices and the coming trend and we have seen that the housing market is declining and also studied the demand and supply of housing with the various factors affecting the housing market of UK. On the basis of above all discussion we can conclude that in UK the housing market will go down around 15% in the coming two years and by Olympics which are going to held in 2010 London market will go down to ¼ and interest rates in UK will be record breaking.
Here we have seen that supply good but the demand is not there so it becomes very difficult to maintain the equilibrium in the market and their objectives are remain unfulfilled.
