Is the UK Housing Market set to Crash?

The Housing market is certainly a popular topic of conversation these days. There was a time when people felt that ‘house prices would always rise’ However, the sobering lesson of the US housing market is that house prices can fall, and when they do it can be very damaging for the economy. In some respects …

Read moreIs the UK Housing Market set to Crash?

Economics of Building Houses

Readers Question: should the government build houses itself, encourage the private sector to build more houses, or play no part in the housing market at all? (justify your answer)

Arguments for Government Building Houses

    • House prices are currently too high due to a shortage of supply. If government increase the supply it will help overcome the shortage and keep houses affordable for first time buyers. If the government don’t build houses there will be a continual shortage and the market will be subject to fluctuations.
    • Shortage acute in certain areas. The government need to target house building in certain areas.
    • Inequality. The high price of UK houses means that it is increasing inequality. People leaving university have to either pay high rent or pay a lot for a mortgage. This means that many young workers have low discretionary income. There is an increasing wealth gap between people in their 20s and people in their 50s. Government supply of houses could help low income earners.

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    Recovery in Housing Market – Who benefits?

    Readers Question: Which businesses are likely to benefit from a recovery in the housing market?

    I think it is a little premature to talk of a recovery in the housing market. But, nevertheless when there is a recovery in the housing market the following firms will benefit.

    • House Builders. At the moment there is a surplus of unsold houses. This is contributing to falling profitability for many large homebuilders. A recovery in the housing market would benefit these firms very significantly.
    • Mortgage Lenders. The Council of Mortgage Lenders in the UK have reported a significant drop in mortgage lending. This reduces the profitability of banks and building societies who lend money to potential home buyers.  An upturn in the housing market would increase demand for mortgage products enabling profitable mortgage loans to be made. If conditions in the housing market improved, mortgage lenders would see an additional benefit of declining mortgage defaults which has been causing significant losses to mortgage lenders and banks who bought the securitisation products.
    • Estate Agents. Estate agents benefit from the number of transactions and the value home sales. An upturn would increase the number of house sales and increase the value of houses meaning that their % share would improve.

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    Mortgage Equity Withdrawal and Economic Growth

    Readers Question: Does mortgage equity withdrawal enhance economic growth?

    There is good evidence that mortgage equity withdrawal can lead to higher levels of consumer spending and economic growth

    Definition of Mortgage equity withdrawal – Mortgage equity withdrawal occurs when homeowners remortgage taking out bigger loans to take advantage of rising property values.

    • Suppose you bought a house for £100,000 with a £95,000 mortgage. (+ £5,000 cash deposit)
    • 10 years later the house might be worth £160,000. Yet, you only owe the remainder of your £95,000 mortgage. If the bank is still willing to lend 95% of the value of your house. You could remortgage for say £150,000. This means you will have a bigger mortgage and will have to pay extra monthly mortgage payments, but you can now spend the extra £50,000 on holidays and cars. Remortgaging is a way for consumers to increase spending. It has become quite common in the UK.

    Mortgage Equity Withdrawal in the UK

    According to the Council of Mortgage Lenders equity withdrawal increased from £10 billion in 1984 to £23 billion in 1988.

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    House Prices and Consumer Spending in the Economy

    Readers Question: in what ways can changes in house prices effect consumer spending, and hence an economy as a whole?

    The Housing Market places a crucial role in determining the state of the UK economy. This is because:

    • Many consumers are also homeowners. (75% of houses are privately owned – higher than in European countries like France)
    • Houses are by far the biggest form of wealth.

    What Would be the effect of falling House Prices on the UK economy?
    Confidence. The value of houses plays a big role in determining homeowners outlook for the future and hence spending. If there is a fall in house prices, there is a fall in people’s wealth. Therefore, consumers will have less confidence. When house prices are falling people will be much more reluctant to start borrowing, consumption is likely to fall. The housing Market receives a lot of media attention. Even a slow down in annual house price growth can make front page headlines. Therefore, the impact of falling house prices will probably be more significant than rising house prices.

    Equity Withdrawal. With falling house prices it will be more difficult to remortgage and take equity withdrawal. (Equity withdrawal is when you get a bigger mortgage against the value of your house and then spend the extra money.) Rising house prices means people can get a bigger mortgage and therefore borrow and spend more. When house prices fall this cannot occur.

    Read moreHouse Prices and Consumer Spending in the Economy

    Government Policy and Supply of Housing

    Suggest various ways in which the supply of houses could be increased in an economy and in particular, explain how governments could help the process?

    The UK housing market suffers from a shortage of supply. Last year, there was a record low in the number of houses being built. These are various policies to help increase the supply of houses.

    1. Loosen Legislation about building on Green belt land.

    The government can make it easier for property developers to build on land protected by the environment. This makes it much easier to find new places to build houses. The obvious drawback is the negative externalities associated with the loss of green space. It is likely to meet opposition from pressure groups committed to protecting the environment.

    2. Building of Council Houses

    This would directly increase the stock of housing. The government can build them in areas where they are most needed. However, it is quite expensive and would take a while. Nevertheless the government would get a rentable income. It could also help key public sector workers.

    3. Legislation to requisition brown field sites.

    This is areas of cities and towns where there is the potential for new housing to be built. This enables new housing without the loss of the environment.

    Read moreGovernment Policy and Supply of Housing

    Why House Prices in the UK are Falling 2008

    The state of the UK housing market seems to get as much coverage in the newspapers as just about every topic, bar the latest escapades of Britney Spears driving through a traffic light. From inches of press coverage, it appears that a fall in the rate of UK house price inflation is vastly more significant …

    Read moreWhy House Prices in the UK are Falling 2008

    UK House Price Crash?

    Readers Question: Critically evaluate the argument for and against the likelihood of an imminent house price correction in UK ?

    House prices in the UK have risen much faster than inflation; in the past 6 years average house prices in the UK have more than doubled. This has caused many to speculate that house prices are overvalued and are likely to fall, in the near future, to more realistic levels.

    These are the arguments in favour of house prices falls.

    House prices have risen faster than average incomes.

    This has made it more difficult for first time buyers, especially the younger generation to get on the property ladder. With falling demand for new houses, it is only a matter of time before this is reflected in lower prices.

    Rising Interest Rates.

    Interest rates have increased 5 times in the past 18 months. This rise in interest rates increases the cost of mortgage payments. Therefore, more people will struggle to make mortgage payments and therefore make renting more attracting than buying. It is also worth noting interest rates have a delayed effect; this means it takes upto 18 months for interest rate increases to have an effect on the economy. Therefore, even if interest rates don’t increase anymore, there will be more people affected by interest rate rises (e.g. those negotiating new fixed rate deals, will see a big increase in cost)


    If house price rises have been caused by the fundamentals of supply and demand, there is unlikely to be any correction. However, some experts believe the booming housing market has created a ‘bubble effect’; this means that speculators and foreign investors have been buying houses to try and make capital gains. If the market turns, then these speculators will seek to leave the market and cash in their capital gains. This could make a small correction much bigger. – Falling house prices lead to a fall in confidence and discourage many others from buying.

    UK investors may also be alarmed by the experience of the US housing market which has already gone from boom to bust.

    Prices overvalued

    Evidence suggests that house prices are already starting to fall in some parts of the country. Demand is falling from many areas of the economy. Bovis, the new house builder predicted prices would fall by 3% this year. link – Times

    A study by PwC suggested house prices are overvalued by 10% – link BBC. This follows reports from the International monetary Fund IMF, which also states UK house prices are fundamentally overvalued.

    However, it is notoriously difficult to decide whether house prices are overvalued or not. For example, back in 2003, many commentators argued house prices were already overvalued. The UK housing market has often defied Market predictions

    Credit Crisis

    The run on Northern Rock, was due to problems in global credit markets. These problems will have an increasing effect on the UK Housing Market. Basically, US mortgage lenders were too willing to lend risky amounts to sub prime lenders. When the housing market faltered there was a rise in mortgage defaults as people couldn’t pay back their repayments. Therefore, many US mortgage companies went bankrupt. This has made other financial institutions much more wary of offering support for mortgage lending. To summarise it is increasingly difficult to get mortgages, especially risky unconventional mortgages. Therefore, this will make it more difficult for first time buyers to get a mortgage; demand will fall further.

    However, UK mortgage lending is generally much stricter than US. At the moment, there is not a significant problem of mortgage defaults. With interest rates unlikely to rise in 2008, affordability is unlikely to deteriorate.

    Read moreUK House Price Crash?

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