The housing market is crucial in any economy, as it provides so many jobs in related industries. It is frequently a good signal of how buoyant the economy is. With recession in the UK, mortgage rationing continuing and many homeowners having to find 20% deposits to buy a house, many would expect the housing market to be showing signs of trouble.
And to some extent this is the case. Studies on house prices have clearly shown how unpredictable this market is and prices remain 0.7% below what they were a year ago. However, in August house prices increased, recording their biggest rise in two and a half years, at 1.3%. For many, this rise was a surprise, but came as a welcome relief following the declines in previous months. Despite this rise, analysts have suggested that this trend is unlikely to continue throughout the rest of the year, as the demand for houses remains weak. Robert Gardner, the Chief Economist at Nationwide said:
“Given the difficult economic backdrop, the extent of the rebound in August is a little surprising. However, we should never read too much into one month’s data, especially since monthly price changes have been impacted by a number of one-off factors this year, such as the ending of the stamp duty holiday for first time buyers’.
So, what is behind this upward trend? Nationwide’s Chief Economist says that it could be explained by a resilient labour market, where employment has risen in recent months, despite the recession. The labour market undoubtedly has a big effect on the housing market, as mortgages do take up so a large percentage of take-home pay.
However, another key factor that affects house prices is the availability of mortgages. The Bank of England and Treasury launched the Funding for Lending Scheme at the beginning of August in a bid to make mortgages cheaper and more easily available. However, analysts suggest that the scheme is yet to have an effect. Furthermore, until deposit requirements are eased, that first step on the property ladder will remain elusive for many people. Mortgage approvals did increase slightly in July, but still remain a major barrier for the housing market to really boom.
The following articles consider this ‘surprising’ rise in house prices and the factors behind it.
Articles
House prices in ‘surprising’ jump, Nationwide says BBC News (31/8/12)
UK house prices record surprise increase Financial Times, Tanya Powley (31/8/12)
Surprise house price rise in August not indicative of market, says Nationwide The Telegraph, Emma Wall (31/8/12)
House prices in surprise rebound Independent, Vicky Shaw (31/8/12)
House prices continue to hold The Economic Voice, Jeff Taylor (31/8/12)
Mortgage approvals still subdued, Bank of England says BBC News (30/8/12)
Banks are pulling back from property – expect prices to fall Money Week, Matthew Partridge (31/8/12)
UK house prices up, as London continues surge Share Cast, Michael Miller (29/8/12)
Data
Lending to Individuals Bank of England 2012
House Price Index Land Registry 2012
UK house prices (links) Economics Network
Questions
- Use a supply and demand diagram to analyse recent trends in the housing market.
- Why is the Bank of England’s lending scheme not having the expected impact on the housing market?
- To what extent do you think the state of the housing market depends on mortgage rationing? Which other factors are likely to affect the housing market?
- In the article from the Economic Voice, the author says that house prices holding as they are is a surprise, because of relatively high inflation and the fact that wages are not keeping pace. Explain the economic thinking behind this view.
- The Chief Economist at Nationwide has said that the future of the housing market depends heavily on what happens to the labour market. Why is this the case?
- Why have mortgages been rationed and minimum deposit requirements been increased?
- Why is the housing market so important for the economy?
The housing market has long been seen as a crucial element in stimulating the British economy. For this reason various incentives had been introduced to encourage people to buy properties. (Click here for a PowerPoint of the chart.)
One such strategy was the stamp duty holiday. Stamp Duty Land Tax is paid by the purchaser of a property against a purchase price and the cost of it will rise through each price band. The stamp duty holiday meant that first-time buyers were free from the 1% stamp duty on homes that cost under £250,000. However, this holiday is due to end from March 2012, as according to the government, the holiday has been ineffective. Indeed, in the Autumn statement documents, the government said:
‘The government is publishing analysis showing that the stamp duty land tax relief for first-time buyers has been ineffective in increasing the number of first time buyers entering the market.’
The government has said that instead it will focus on other strategies that provide better value for money. Such schemes include a mortgage guarantee scheme and the FirstBuy scheme launched last year, both of which aim to help those struggling to finance the purchase of their first properties.
According to the Land Registry, property prices have fallen by over 1% over the past year, so fewer properties will face the stamp duty land tax, but this data does little to instill confidence in the housing market being the stimulus that the economy needs. By stimulating the housing market, construction jobs should be created and this in turn should create a much needed multiplier effect helping to boost other sectors within the economy. The following articles consider this latest development.
Stamp duty rush boosts January valuations Mortgage Strategy, Tessa Norman (11/2/12)
New deals for buyers as stamp duty holiday ends BBC News, Susannah Streeter (11/2/12)
Autumn Statement: Stamp duty concession to end BBC News (29/11/11)
First-time buyers boost mortgage market activity FT Adviser, Michael Trudeau (9/2/12)
When shared ownership turns sour Guardian, Rupert Jones (10/2/12)
Questions
- Why does the housing market play such a crucial role in the economy?
- What is the multiplier effect? How will new jobs in the construction industry help other sectors in the economy?
- Why has the stamp duty holiday been ‘ineffective’ in stimulating the housing market?
- How have the other schemes introduced by the government created incentives in the housing market?
- Why have January valuations improved? Use a demand and supply diagram to illustrate your explanation.
Throughout the credit crunch and since then, one of the major problems in the global economy has been a lack of lending by banks. A key cause of the credit crunch and many of the debt problems countries and people face today is because of people living off borrowed money. In the past, credit was so easy to obtain – people could receive a mortgage for more than 100% of the value of their property. However, when more and more people began to struggle to make their monthly mortgage repayments, the banking crisis began and since then mortgage lenders have become increasingly wary about who they lend to and how much.
The Bank of England has said that in the coming months it will become even harder to obtain mortgages, as banks become increasingly wary about who becomes their customer and potential home buyers put off even applying for a mortgage. Although mortgage approvals are at a 2-year high, they still remain significantly below their pre-crisis level. Indeed, the Bank of England said:
“Lenders expected the proportion of total loan applications being approved to fall over the coming quarter with some lenders commenting that they had revised down expectations for households’ disposable incomes and hence the affordability of taking out new secured loans.”
As part of this new rationing of mortgages, lenders are requiring applicants to put down larger and larger deposits and so for first time buyers, getting on to the property ladder is becoming more and more of a dream. The property market has been suffering from this mortgage rationing as house sales are down below their pre-crisis level. The housing market is crucial to any economy, as so many other sectors and hence jobs depend on it. If mortgages remain scarce and the required deposit so high, the UK housing market is likely to remain stagnant and this will certainly prove damaging for the prospects of the UK economy in 2012.
Articles
Mortgage approvals hit new two-year high The Telegraph, Angela Monaghan (4/1/12)
Mortgage approvals up but overall lending weak Reuters (4/11/12)
Mortgage rationing becomes worse, Bank of England says BBC News (5/1/12)
Mortgage demand fell in Q4 2011, say lenders Mortgage Strategy, Tessa Norman (5/11/12)
Mortgage lending still stagnant, Bank figures show BBC News (4/11/12)
BoE: Lending to be tighter in Q1 2012 Mortgage Introducer, Yuan Phoon (5/11/12)
Data
Lending to Individuals Bank of England
Questions
- Why are mortgages being rationed?
- Why is the housing market so important for the UK economy?
- Which other sectors of the economy employ people whose jobs are dependent on a buoyant housing market?
- Why has the Bank of England said that in the coming months it will become harder to get a mortgage?
- Why would increased mortgage lending be a much needed stimulus for the UK economy?
- Using an aggregate demand and aggregate supply diagram, show how rationing of mortgages and other loans will affect the UK economy.
Despite better economic growth in the first quarter of 2011, confidence remains low and according to Halifax, this has contributed to a decline in house prices from March to April by 1.4% to give their lowest average price since July 2009. Halifax has blamed this steady decline on a lack of confidence and the uncertain economic climate. However, despite this latest decline, Halifax have suggested that the trend may be coming to an end. Martin Ellis, from Halifax had this to say:
“Signs of a modest tightening in housing market conditions, a relatively low burden of servicing mortgage debt and an increase in the number of people in employment are all likely to be providing support for house prices, curbing the pace of decline. There are signs that house sales are stabilising, albeit at a level lower than the historical average.”
There are many factors that contribute towards house prices: the number of properties on the market, the number of buyers, the availability of mortgages and finance, interest rates and the future economic climate. How these factors change will have a crucial influence on the future house price trend. The following articles consider the causes and likely consequences of this latest housing market data.
House prices fall at fastest rate in 18 months Telegraph (9/5/11)
House prices ‘fell by 1.4% in April’ the Halifax says BBC News (9/5/11)
House prices post biggest fall in 1-1 ½ years Reuters, Fiona Shaikh (9/5/11)
House prices dive to a two-year low Independent, Nicky Burridge (9/5/11)
UK housing market remains weak Wall Street Journal, Jason Douglas (9/5/11)
U.K April house prices fall most in seven months, Halifax says Bloomberg, Svenja O’Donnell (9/5/11)
Questions
- What are the main causes behind this decline in house prices?
- The articles talk about the volatility of house prices over recent months. What is the explanation for this?
- If interest rates are increased by the MPC, is it more or less likely to cause house prices to decline further? Explain your answer.
- Why dies Martin Ellis, of Halifax, believe that the decline in house prices might reverse this year?
- How does the housing market affect the wider UK economy? Is these latest data likely to jeopardise the fragile recovery?
House prices are in the news again, but that should come as no surprise because they are such a favourite topic of the British! Three different organisations – the Halifax Bank, the Nationwide Building Society and Rightmove – have all reported that house prices fell in November. The Halifax reported a 0.1% fall, the Nationwide a 0.3% fall and Rightmove a 3.2% fall. The Halifax and Nationwide base their figures on house price information supplied by prospective mortgage applicants while Rightmove report the average asking price of those putting their property on to the market. We should not worry too much about the variations in the magnitude of the reported price falls because the downward trend in house prices is now pretty well established. The Halifax, for instance, has reported five monthly falls since April and they estimate that the average house price over the three months to November is 0.7% lower than a year ago. While the other two organisations are still reporting annual house price inflation rates in positive territory, these rates too are edging closer and closer to negative territory.
The recent falls in house prices come after a rebound in prices in the second half of 2009 which carried on into the early months of this year. The Nationwide had annual house price inflation rates peaking in the spring at around the 10% mark. This appears to have reflected an increase in housing demand and can be seen in the Bank of England mortgage approval numbers for house purchase which recovered from as low as 26,702 in November 2008 to 59,215 in November 2009. By April, Rightmove was reporting that property supply was beginning to outstrip demand and in their May report they noted that suppliers were coming on to the market more quickly than at any time since June 2008. It is argued that supply increased further through late May and into June when the new coalition government suspended house information packs (HIPs). HIPs were a set of documents, including a property information questionnaire, which a seller needed to provide before a property could be marketed.
Rightmove reported in their November press release that the number of new sellers coming to the market each week between 10 October and 6 November averaged 24,028. This was a fall of 9.1% on the previous 4-week period. But, we need to see this reduction in the context of housing demand and the mortgage approvals numbers again provide clues as to the strength of housing demand. The fall in approvals in October to just 47,185 approvals was the sixth consecutive monthly fall. This number of approvals, as Rightmove note, is about half the monthly number of additional properties coming on to the market. In other words, the flow of properties coming on to the market is contributing to a large stock of properties on the books of estate agents. While some existing suppliers have been taking their property off the market, Rightmove note that the current average number of unsold properties on estate agents’ books is only a little down on the historic high reported a couple of months back. This leaves sellers fighting over a limited number of prospective buyers.
In the short term, the extent of further downward pressure on house prices will depend on extent of the imbalance between demand and supply. If a large number of suppliers begin to remove their property from the market, perhaps on the hope that the market will improve later next year, this would help to address the imbalance. Equally, if first-time buyers were to return to the market in larger numbers then that too would help to alleviate downward pressure on prices. The latter, however, is unlikely given the tight credit conditions which are resulting in potential first-time buyers struggling to find the deposit needed to get on to the property ladder. It seems that while many wannabe buyers of property may have a willingness to purchase, their ability to purchase continues to be frustrated by their inability to find the necessary deposit.
Articles
House prices slip further in November Financial Times, Norma Cohen (9/12/10)
Bonus for first-time buyers as house prices plummet for the third month in a row Daily Mail (9/12/10)
House prices drop fort he third month, has the bubble burst? London Daily News (9/12/10)
House prices fall 0.1% but hopes rise Independent, Peter Cripps (9/12/10)
House prices drop amid mortgage ‘deep freeze’ Telegraph, Myra Butterworth (9/12/10)
Data
Mortgage approval numbers are available from the Bank of England’s statistics publication, Monetary and Financial Statistics (Bankstats) (See Table A5.4.)
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
- Tracking house prices is like following a roller-coaster ride! See if you can re-tell the story of UK house prices over the past year using demand and supply diagrams.
- Why do you think UK house prices are so volatile? Can you point to any other market where prices are so volatile? If so, do they share any common features?
- How important are first-time buyers in affecting house prices? What factors do you think affect the number of prospective first-time buyers deciding to enter the housing market?
- Using a demand and supply diagram illustrate the effect on house prices of: (i) a tightening of financial institutions’ lending criteria; (ii) the expectation of forthcoming house price falls; and (iii) increasing economic confidence .
- Although UK house prices are volatile they do increase over the longer-term and by more than the average price of consumer goods and services. What might explain this?
- What do we mean by a demand-supply imbalance? Would you expect this imbalance to continue?
- The average house price is currently falling. But, different housing markets will have their own price patterns. What might explain any differences in house price patterns across different housing markets?
The housing market is crucial in any economy, as it provides so many jobs in related industries. It is frequently a good signal of how buoyant the economy is. With recession in the UK, mortgage rationing continuing and many homeowners having to find 20% deposits to buy a house, many would expect the housing market to be showing signs of trouble.