The latest mortgage approval numbers from the Bank of England continue to demonstrate the fragility of the UK housing market and, in particular, waning levels of activity. The 47,474 approvals in September was the lowest number since February. The downward momentum in approvals has gained pace in recent months. The number of approvals in Q3 was 2.9% lower than in Q2 and was 11.5% lower than in Q3 of last year. All of this provides evidence that housing demand is weakening.
Tight credit conditions have affected the supply of mortgages for some time and, as a consequence, negatively impacted on the number of house buyers. This is likely to be especially true for potential first-time buyers who have no housing equity with which to help purchase property. But, the marked downward momentum in mortgage approvals is reflecting a weakening in housing demand.
So what explains this weakening of housing demand? In part, it is likely to be current economic conditions. But, expectations of future economic conditions are crucially important in determining activity levels in the housing market. With concerns about future economic growth it would be no surprise if households are feeling more than a little cautious about their spending plans and about their household finances. Economic uncertainty amongst households does not bode well for activity levels in the housing market. If this line of thinking is right we can expect mortgage approvals numbers to remain subdued for some time to come.
Articles
Drop in mortgages sparks concerns over house price falls The Herald, Ian McConnell (30/10/10)
Housing dip feared as mortgage approvals stall Guardian, Mark King (29/10/10)
UK mortgage approvals decline Irish Times (29/10/10)
Net mortgage lending slumps to just £112 million Independent, James Moore (30/10/10)
Mortgage approvals lowest since Feb Reuters (29/10/10)
Data
Mortgage approval numbers and other lending data are available from the Bank of England’s statistics publication, Monetary and Financial Statistics (Bankstats) (See Table A5.4.)
Questions
- What variables do you think will affect the demand for mortgages?
- What variables do you think will affect the supply of mortgages by lenders?
- What do you understand by housing and mortgages being complementary products? Why might the complementary relationship between housing and mortgages be stronger for first-time buyers?
- If housing demand weakens, would we expect house prices to fall? Are there circumstances when a weakening of demand might not translate into lower house prices? Illustrate your answer using demand and supply diagrams.
Reforms and budget cuts seem to be the norm across the world. In the UK, we’ve seen announcements about substantial cuts in government spending and reforms to our welfare state, including child benefit and pension reforms. But how will people react? Perhaps, we should look to France to see what could be to come. People across the country are protesting against the plan to raise the pension age from 60 to 62.
Workers at French oil refineries have ceased work and, as as a result, shortages of petrol across France look set to continue. There has been mass disruption to various transport markets, including cancelled flights and lorry drivers using ‘go-slow tactics’.
Furthermore, it’s not just workers at oil refineries who are on strike. Rubbish remains uncollected; oil tankers are floating off the coast; rail strikes and postal strikes have disrupted daily life; and even the school system has been affected. But, what are the costs of these strikes? Will the French economy suffer? Will economic growth be affected? It’s certainly an inefficient use of resources and will undoubtedly cost money.
Yet, despite these strikes, the President has said that the reforms will still go ahead, as he looks forward to a Senate vote on the pension bill. But what are the problems necessitating pension reform, not just in France, but across the world? And will it be France’s turn to experience a ‘winter of discontent’?
French strikes force petrol stations to shut BBC News (18/10/10)
Defiant Marseille, heart of France’s social unrest Reuters (18/10/10)
French Fuel Crisis: Protests turn violent Sky News, Huw Borland (18/10/10)
JPMorgan says French strike will cut demand for oil next year Bloomberg, Grant Smith (18/10/10)
French strikes hit airlines, trucking, gas pipes Philippine Star (19/10/10)
French riot police clash with students as petrol stations run dry Telegraph, Henry Samuel (18/10/10)
French based for another day of strike action Guardian, Angelique Chrisafis (18/10/10)
France strike: flights cancelled, airlines told to carry enough fuel for return journey Telegraph (18/10/10)
Questions
- What action other than striking is open to workers? What are the costs and benefits of each?
- Why are strikes by groups of workers likely to be more effective than protests by individual workers?
- Illustrate on a diagram the effect of a trade union entering an industry. How does it affect equilibrium wages and equilibrium employment? Is there any difference if the trade union faces a monopsonist employer of labour?
- What are the efficiency arguments against strike action?
- How are oil prices determined? What will be the impact on oil prices of these strikes in France? Will there be an impact on the rest of the world?
- What are the key issues necessitating pension reform? Are these issues worth the price of the strikes?
Some numbers are a newspaper editor’s dream! One such number this week was -3.6%. This was the fall in house prices in September reported by the Halifax (part of the Lloyds Banking Group). This certainly helped to alert a large audience to the downward momentum in house price growth that has been underway since about the start of the summer. While the Nationwide Building Society reported a 0.1% rise in September it is significant that both Halifax and Nationwide estimate that across the three months to September house prices actually fell by around 0.9%. In other words, the average UK house price fell by 0.9% in the third quarter of the year.
The annual rate of house price inflation, as the name suggests, compares house prices with the same point in time a year ago. The impact of the house price falls in the third quarter has been to reduce the annual rate of house price inflation to around the 3% mark. While the annual rate is still in positive territory, an obvious concern is how long this will be the case. Well, we can expect the annual rate to fall further because the UK saw strong house price growth in the final quarter of 2009 – the Nationwide estimates this to have been 2.2%. If I (Dean) was to throw my hat in the ring and hazard a guess as to the annual rate of house price inflation in the final quarter of 2010, I’d be inclined to say that it would be around the zero mark. If my crystal ball is found to be right, it would mean that house prices will end 2010 no higher than they finished 2009.
Now this is going to surprise you, but there has been considerable agreement amongst economists as to the reasons behind the recent house price falls. In short, it has been shifts in housing demand and supply. The evidence, such as that from estate agents, points to increases in houses prices during the second half of 2009 and the early part of this year as having induced additional housing supply. This means that estate agents saw instructions to sell increase strongly. People felt a little more confident about putting their property on the market and there was also a recovery in the volumes of new homes constructed.
So far, so good, you might think. But, as this year has moved on growing uncertainty about the economic environment and the on-going difficulties facing many potential buyers, especially first-time buyers, in obtaining mortgage credit, has contributed to a weakening of demand. The impact on the number of potential first-time buyers has been particularly acute because, by being increasingly credit-constrained, they have in effect become increasingly deposit-constrained too. The point is that buyers, especially first-time buyers, are being asked to find relatively large deposits to compensate for limited mortgage credit and both their limited ability and willingness to find these deposits is impacting on housing demand. So with a weakening demand we have been left with what Rightmove describes as a ‘supply hangover’. The effect has been for prices to fall.
It is a feature of housing markets that demand–supply imbalances induce considerable volatility in house prices. Going forward, it will continue to be the relative magnitudes of instructions to buy (housing demand) and of instructions to sell (housing supply) that will determine the path of house prices. Just how imbalanced will those estate agents books remain? How long will the supply hangover persist? Could supply increase further as people rush to sell and thereby further destabilising the market? Or will sellers begin taking property off the market, deciding that now is not the time to sell? Questions like these help to show just how real and how exciting the concepts of demand and supply are. Demand and supply are not concepts confined to the pages of textbooks they are alive and at work. The UK housing market demonstrates just how alive they are!
Articles
House prices record worst monthly fall ever Independent, Alistair Dawber (8/10/10)
Regions slip behind in bleak housing market Financial Times, Norma Cohen (8/10/10)
What next for house prices? Telegraph, Kara Gammell (8/10/10)
Fears grow for new market crash as house prices plummet Daily Record, Holly Williams (8/10/10)
Property price plunge blamed on need to sell The Herald, Helen McArdle (8/10/10)
Housing market crash feared after average house prices take record plunge Guardian, Jill Treanor (7/10/10)
UK house prices fell 3.6% in September, Halifax says BBC News (7/10/10)
Data
Halifax House Price Index Halifax (part of the Lloyds Banking Group)
Nationwide House Price Index Nationwide Building Society
Rightmove House Price Index Rightmove
Live Tables on Housing Market and House Prices Department of Communities and Local Government
Questions
- 2010 has been a year of contrasting fortunes for house prices. See if by using a demand and supply diagram you can illustrate the impact of demand and supply shifts on house prices in the first half of the year and then do the same again for more recent months.
- What do Rightmove mean by a ‘supply hangover’? What factors do you think will determine whether this effect persists?
- You become an estate agent. You buy 2 big books. One is to be used to record instructions to buy and the other instructions to sell. You have a meeting with your staff where you discuss those factors that you think will determine how full these two books will be from period to period. What factors do you think you are likely to identify? What impact would one book being fuller than the other have on house prices?
- Explain what we mean by a potential house buyer being credit-constrained. What is meant by a potential buyer being deposit-constrained? Why might first-time buyers be more deposit-constrained than other types of buyers?
- You often hear people talk about the housing market. But, what do we mean by a market? And what do we mean by a housing market? Do prices in all housing markets behave in the same way?
- We’ve seen that there are several institutions that publish an average house price figure. How do you think the likes of Halifax and Nationwide do this? What of Rightmove? Are there any other ways of estimating the average house price? Can you think of any problems that might arise with these estimates?
- It’s now your time for you to dust-off your crystal ball. Imagine that you are employed to write a monthly commentary on UK house prices. What would you expect to be reporting in the coming months?
Blockbuster US has become the latest in a long line of companies filing for bankruptcy. With huge debts and a need to restructure the business, given the huge competition in America, Blockbuster has made agreements with its creditors to cut its debts from $1 billion to $100 million. Blockbuster has suffered from mail-order and online film rental services, in particular in America.
Blockbuster is a worldwide phenomenon with stores ranging from the UK to Mexico. However, as legally separate entities, the non-US branches of Blockbuster are protected from the bankruptcy. While the UK branches will remain unaffected, there are concerns that they may suffer from a lack of new DVD stock, especially with the approach of Christmas.
As news of Blockbuster’s bankruptcy spread, Netflix – a key competitor – saw its shares soar. Netflix was a catalyst in the demise of Blockbuster US and it has seen its market share increase rapidly over the past few years, with subscribers increasing from 1 million in 2002 to 15 million in 2010. Blockbuster responded by ending late fees and started its own online services, but it has been unable to compete effectively in this competitive market. Although restructuring of Blockbuster has begun, only time will tell what the future is for this once dominant movie rental firm.
Blockbuster files for Bankruptcy in US BBC News (23/9/10)
Blockbuster fizzles in US, but renters overseas haven’t switched to Netflix – yet The Christian Science Monitor, Stephen Kurczy (23/9/10)
Blockbuster files for Chapter 11 protection Guardian, Richard Wachman (23/9/10)
Blockbuster wins Court’s approval to draw $20 million from bankruptcy loan Bloomberg, David McLaughlin and Tiffany Kary (23/9/10)
Fitch lowers debt rating on Blockbuster Bloomberg BusinessWeek (23/9/10)
Netflix shares hit high after Blockbuster bankruptcy Reuters, Sue Zeidler (23/9/10)
Debt, changing media habits topple Blockbuster The Associated Press, Mae Anderson (23/9/10)
Questions
- What are the key factors behind Blockbuster’s decline?
- New competitors have entered the market for movie rental. Illustrate this on a diagram. How can we use this to explain Blockbuster’s problems?
- Online services and mail-order have become increasingly popular services in this market. Is the extra competition in the market in the best interests of consumers?
- What type of market structure is the rental movie industry? Explain your answer.
- What type of legal structure does Blockbuster operate under? What are the key advantages and disadvantages of this?
- Why are the non-US chains not affected by the bankruptcy of Blockbuster US?
- Have a look at the share prices of Blockbuster and Netflix. What has happened to them over rthe past year? Is this consistent with recent developments?
The price of gold has hit a record high of over $1282 per ounce. By contrast, in 2007 it was trading at under $700 per ounce and in 2001 at under $300 per ounce. Various uncertainties in the world economy have led to large rises in the demand for gold by both central banks and investors in general.
But why has the gold price risen so dramatically and what is likely to happen to the price in the coming days and months? Some commentators are saying that the gold price has further to rise. Others are saying that it is already over priced! The following articles look at the explanations and the arguments.
Articles
Monetary easing fears lift gold to record high Financial Times, Javier Blas (17/9/10)
Five-fold rise in gold price ‘is not a bubble’, claims industry body Independent on Sunday, Mark Leftly (19/9/10)
Gold Prices Today Are Increasing to Record Levels Business and Finance News, Aidan Lamar (18/9/10)
Gold hits new peak of $1,283 Telegraph, Richard Evans (17/9/10)
Gold hits new record high Guardian, Julia Kollewe (17/9/10)
Gold prices – the highs and lows since 1971 Guardian, Julia Kollewe (17/9/10)
Gold is overpriced, so be wary of those ads to buy it Idaho Statesman, Peter Crabb (17/9/10)
Data
Gold prices World Gold Council
Commodity price data (including gold) BBC Business: Commodities
Questions
- Why has the price of gold risen? Illustrate your arguments with a demand and supply diagram.
- How are these demand and supply factors likely to change in the near future?
- What is the role of speculation in the determination of the gold price? What particular factors are speculators taking into account at the moment?
- Why have actions by the Bank of Japan (see A Japanese yen for recovery) influenced the gold price?
- Why have possible future actions by the US Federal Reserve Bank influenced the gold price?