The winter months traditionally see lower house sales and prices tend to remain steady or fall. However, house prices had continued to increase over Christmas, as the stamp duty holiday came to an end. In a bid to boost the housing market, the stamp duty threshold had been pushed up from £125,000 to £175,000 for just over a year. This seemed to work, as the housing market did rally throughout 2009 and in particular, in the final months of 2009. Mortgage approvals increased, as first-time buyers in particular tried to complete before stamp duty fell back to £125,000.
However, the end of this ‘holiday’, combined with the icy conditions experienced throughout the UK were contributing factors in the first decline in house prices in about 9 months. According to Halifax, house prices in February fell by 1.5%. House prices are still higher that they were 9 months ago, but the upward momentum they did have, has now taken a dive. Mortgage lending was also down in January by about 32%.
Another factor that has contributed to this downturn is the increased number of properties on the market. Throughout 2009, the number of properties for sale was relatively low and as such, ‘Sale agreed’ notices were appearing on properties within days of them being for sale. This imbalance between demand and supply is now beginning to even out. Is this downward trend merely a blip or does it spell further trouble for the UK economy?
Articles
Snow and end of stamp duty holiday leads to first property price decrease in the UK for nine months PropertyWire (1/3/10)
UK house prices see first fall since June, says Halifax BBC News (4/3/10)
Mortage lending slump prediction comes true as stamp duty returns Daily Mail Online (23/2/10)
House price ‘lose momentum’, says Nationwide BBC News (26/2/10)
Snow and tax send house prices down 1.5% (including video) Times Online, Francesca Steele (4/3/10)
UK house prices fall, snapping rally Telegraph (4/3/10)
House prices fall in February Guardian, Hilary Osborne (4/3/10)
Data
For the Halifax data, see
Halifax house Price Index, February 2010
See also Lloyds Banking Group Housing Research home page and in particular the Historical House price Data link
Questions
- What is stamp duty and how did an increase in the threshold aim to stimulate the housing market? Can this be illustrated diagramatically?
- Illustrate how house prices are determined using a demand and supply diagram.
- One factor that had caused house prices to rise was a lack of supply. Show this on your diagram. Are there any factors that make price fluctuations even more severe, following changes in the demand and supply of houses?
- Illustrate how the imbalance of demand and supply has begun to even out.
- Why is the state of the housing market such an important factor in determining the strength of the economy?
- How do interest rates affect the housing market? Think about the impact on mortgages. Why have mortgage approvals fallen?
- To what extent has the weather contributed to falling house prices?
For many people, internet access is something we take for granted and if you can’t afford to connect, you might be seen to be in relative poverty. Whilst you can afford food, clothes, housing etc, other goods and services are increasingly being seen as necessities. Everyone should be able to afford a mobile phone, a television, the internet. These are all factors that contribute towards a feeling of social inclusion, which is something the government has promoted since its election in 1997.
Although internet access is the norm for most people, in the UK our internet speeds are actually significantly slower than those in other industrialised countries. All this could be about to change, with Labour’s proposal for a 50p monthly tax on households’ landlines to fund super-fast broadband across the country. However, this plan has been condemned by some influential MPs, who argue that the tax is regressive.
“We believe that a 50 pence levy placed on fixed telecommunication lines is an ill-directed charge. It will place a disproportionate cost on a majority who will not, or are unable to, reap the benefits of that charge.”
More important, they argue, is to make sure that everyone has internet access, rather than that everyone has fast access, which is not needed at the moment. When there is a demand for high-speed access from the masses, the market will provide it. However, the government argues that high-speed access is crucial to our economic growth, as it allows access to huge social, economic and health benefits. On the other hand, could such a tax reduce growth, by limiting technological innovation? The Conservatives have promised that if elected, they will scrap this broadband levy and instead aim to fund high-speed internet access by providing ‘BT’s rivals with regulatory incentives to roll out new telecoms networks’. This highly contentious issue is discussed in the articles below.
The Broadband tax: dead in the water? BBC News, Rory Cellan-Jones (23/2/10)
Broadband tax plan condemned Press Association (23/2/10)
Social tariff users need to be made aware of broadband tax exemption Broadband Expert (17/2/10)
Broadband tax could dissuade technology innovation Broadband (27/1/10)
Tories pledge rise in broadband speed Financial Times, Andrew Parker and Ben Fenton (9/2/10)
Fast broadband: an election issue? BBC News, Rory Cellan-Jones (3/2/10)
Questions
- What will be the effect of a tax on landlines? Illustrate this on a diagram and think about who will be affected. What type of tax does it represent: direct, indirect, specific, ad-valorem, etc?
- Is the tax fair? Why is it argued to be regressive?
- How will the Conservative party’s aim to provide regulatory incentives to BT’s rivals allow them to provide high-speed internet access? Is their solution better than Labour’s proposal?
- Why might the provision of high-speed internet access (a) stimulate economic growth and (b) constrain economic growth?
- Use a growth model to illustrate the importance of technological progress in achieving high levels of economic growth.
- How will a tax affect households? Consider the impact on income and consumption and hence on aggregate demand.
Is this a problem you find when you go shopping? Maybe that’s because the shop that sells it has closed. A report by the Local Data Company has revealed that one in eight shops stand empty on Britain’s high streets, after the recession saw vacancies shoot up by 24% in the second half of 2009. The number of empty town-centre shops climbed to 17,880 in the second half of 2009, equivalent to 12% of the 149,000 shops covered by the research.
Margate in Kent and Wolverhampton in the Midlands were two of the worst-hit areas, where vacant shops stood at 27% and 24% respectively. Take a stroll down a high street in almost any city or town in the UK and you are bound to see ‘Shop for let’. We’ve seen Woolworths and Borders close down and Threshers’ parent company collapse. But these stores have largely remained empty.
Empty houses have also been a problem as the number of repossessions increases. Statistics show an average of 126 people a day were thrown out of their homes in 2009. What is the explanation behind this?
An obvious answer is the recession. As shops felt the strain of low demand, some were simply unable to cope and they shut down as a result. At the same time, new firms were reluctant to take the risk and enter the market during an economic downturn – and who can blame them?
However, are there other reasons why Britain’s high streets are seeing more and more empty shops? The following articles look at the reshaping of our high streets and some of the explanations behind it.
Empty Shops
Shops ‘empty due to recession’ The Press Association (11/2/10)
UK recession has left one in eight shops empty Telegraph, Graham Ruddick (11/2/10)
Bradford second worse for empty shop premises Telegraph and Argus, Will Kilner (11/2/10)
25% of town shops now empty Express and Star (11/2/10)
British town centres in crisis, conference told Reuters, Sinead Cruise (10/2/10)
Empty shop numbers continue to rise in UK Property Week, Laura Chesters (10/2/10)
Empty shops caused by more than recession Startups (12/2/10)
Empty Homes
Buy-to-let: Landlords blow as tenants struggle to pay Telegraph (11/2/10)
Housing Minister says repossession is the ‘best thing’ for homeowners Telegraph, Myra Butterworth (11/2/10)
Home repossessions at highest since 1995 This is Money (11/2/10)
Questions
- What are the main factors behind the high number of empty shops? Use a demand and supply diagram to illustrate these factors.
- In the Startups Article, the BRC Director says: “High street shops are often battling big bills for business rates and rents, parking and access difficulties, as well as failure to manage and invest in the area.” Illustrate this on a diagram and explain how this effect has contributed to empty shops.
- To what extent is more internet shopping the main cause of the problem? Why is it cheaper to run a business via the internet than on a high street?
- Why have some cities and towns been more affected than others?
- Is there a link between empty shops and repossessions?
- What more could the government and local councils do to try to encourage businesses to set up on the high street?
UK Parliament’s Environmental Audit Committee has concluded that the European Emissions Trading Scheme (ETS) is not working as it should. Thanks to a total emissions cap that is too low in a time of recession, the carbon price has fallen. The result is that there is no longer sufficient of an incentive for firms to invest in green technology. As the Financial Times article (below) reports:
The committee has urged the government to consider other measures, such as a floor price for carbon dioxide emissions, which would provide industries with greater certainty over the price of carbon and help to ensure the system of pricing was effective.
The MPs said a price of €100 per tonne of CO2 could be necessary to encourage investment, compared with current prices of about €13.
So is the committee correct? Or is a low price of carbon merely temporary, with firms realising that the price will rise as the European economy recovers? The following articles examine the issues.
Carbon markets failing, say British MPs Financial Times, Fiona Harvey (8/2/10)
Carbon prices are going the wrong way Independent, David Prosser (8/2/10)
U.K. Lawmakers Call for Intervention in Carbon Market BusinessWeek, Catherine Airlie and Ewa Krukowska (8/2/10)
UK should press EU for tighter carbon caps Reuters, Nina Chestney (8/2/10)
MPs propose carbon tax to boost green investment Guardian, Terry Macalister (8/2/10)
As UK Cap and Trade Falters, Government May Prop Up Carbon Prices Environmental Leader (9/2/10)
EU ETS intervention call howled down CarbonPositive (9/2/10)
The report
The role of carbon markets in preventing dangerous climage change Environmental Audit Committee
Questions
- Explain how the ETS works.
- What determines the price of carbon in the ETS? Why has it fallen in recent months?
- Compare the alternative policy approaches for encouraging green investment.
- What are the advantages and disadvantages of setting a floor price for carbon permits? What would be the effect on the balance of demand for and supply of premits?
- Discuss whether the total number of permits allocated should be reduced (i.e. the cap tightened).
- Compare the relative merits of giving the allocation of permits away with auctioning them.
- Compare the relative merits of a cap-and-trade system with green taxes.
Until recently, gold prices had been rising. If you watch TV, you can hardly have failed to notice the adverts offering cash back for your gold. After peaking on the 2nd December 2009, however, at about $1220 an ounce, the price of gold fell almost $100 in just four trading days.
Over the past two months, we’ve seen a fluctuating US dollar and a fluctuating price of gold. In the news item ‘A golden age‘ we looked at the factors that led to a rising price of gold and one key factor was the weakness of the dollar. However, the dollar’s downward spiral appears to have halted, at least for the time being.
Figures for US GDP were higher than expected, with increases in economic activity in the 4th quarter of 2009. This may partly explain why the dollar strengthened, and prices of gold began to fall, as people began investing in US assets. And it was not just gold that fell – there was speculation that the price of copper too would fall as investors switched to US assets.
Then, at the end of January the dollar fell against most currencies and a variety of refined products recovered from recent losses incurred. This pause in the demand for the dollar may cause gold prices to increase once again, as traditionally, gold moves inversely to Greenback. Although the price of gold was down 1.1% for the month of January, speculation that the US budget deficit could be as big as $1.6 trillion could mean further support for gold and testing times to come for the dollar.
At the beginning of February 2010, the US dollar weakened against the euro, as investors favoured a return to riskier assets in search of higher returns, encouraged by signs of strengthening manufacturing in key economies. With the global economy coming out of the worst downturn in decades, will the dollar begin to strengthen?
Dollar advances on reduced demand for risk Wall Street Journal (15/1/10)
US dollar on defensive as risk appetite rises Business News (2/2/10)
US dollar on defensive as risk appetite rises Business News (2/2/10)
Why the price of gold is rising BBC News (13/10/09)
Gold trend remains firmly down despite dollar rally confronted by massive US budge deficit The Market Oracle (1/2/10)
Gold may rise for first time in week as dollar spurs demand The China Post (2/2/10)
Dollar and Yen fall as optimism returns Daily Forex Strategy Briefing, Hans Nilsson (2/2/10)
Gold declines for second day, as dollar’s advance curbs demand Bloomberg, Kim Kyoungwha (8/1/10)
Crude ends up as equities rise, dollar slips Reuters (25/1/10)
Copper may decline as stronger dollar saps demand Bloomberg (22/1/10)
Questions
- How is the price of gold determined? Use a diagram to illustrate this process. If there is a change in demand or supply for gold, what factors will affect the extent of the price change?
- Why does a strengthening dollar imply a lower price of gold?
- Why will a large US budget deficit support gold, but test the dollar?
- How is the exchange rate determined? What factors affect the supply of dollars and the demand for dollars?
- What are the main factors that could explain why there has been a rise in the dollar? Could speculation play a role?