Residential property market in the United Kingdom

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Contents

[edit] The housing crisis

The housing crisis has caused the British Government to launch two reviews of the housing market, due to dramatic market failure (only 134,000 new builds for more than 230,000 household formations per year, and rising), the Barker Report (supply issues and what can be done to increase flexibility in the market) and the Miles Report (the UK mortgage industry and how it can be made more long-term).

The figure of 134,000 built in 2002 is contradicted by the National House-Builder Council [1] which quotes there were 160,800 homes built in 2002. In 2006 they quote 185,000, which is above the original Barker report estimate of 179,000 household formations a year. For example, in the 1990s, an average of 158,910 houses were built each year (NHBC figures) against 172,000 for each of the five years to 2006. Prices at the end of the 1990s, when adjusted for inflation, were less than at the start of 1990, whereas prices between Q4 2001 and Q4 2006 increased 60%, again when adjusted for inflation (figures from the Nationwide Building Society's house price data: [2]). House prices at the end of 2006 were 35% above the trend prices of the last 30 years.

Increased divorce rate is another often quoted reason for increasing house prices, but this metric peaked in 1993 [3] - a year of static or falling prices.

There is more evidence that Buy-to-Let has created a shortage in houses to buy than there is for high levels of homelessness. In 1990s Buy-to-Let accounted for about 1% of loans taken out for the purposes of buying a house. In 2006, the 330,000 buy-to-let mortgages that were taken out accounted for 9% of outstanding home loans (Council of Mortgage Lenders [4]).

[edit] Causes

Housing market failure occurs for a number of reasons.

[edit] Regulations

Planning controls and building regulations restrict supply, increasing the price of new housing and reducing the quantity created. As demand increases steadily, this leads to an upward-trend of housing prices.

[edit] Speed of construction

The time taken to build new houses, and the time taken to get planning premission means that supply can respond only slowly to denmand, leading to inelastic supply. Price-inelastic supply means that large increases in demand will only lead to only a small increase in the number built, and a large increase in price.

[edit] Lack of labour and materials

A lack of skilled labour for construction, and also expensive building resourses, increases the cost of production, which is passed on to homebuyers. Raw-matereal costs have been further increased by the recent surge in commodity prices.

[edit] Low interest rates

Artificially low interest rates make mortgages more attractive, increasing demand.

[edit] Economic Growth

Housing is a normal good; as incomes rise, more of it will tend to be consumed. As such, following decades of strong growth, the demand for housing will increase substantially.

[edit] Speculation

The increasing value of houses lead to people buying houses in the confidence that, after they had been rented out for a while, they could be sold for a profit. This further increased demand.

[edit] The Solution

[edit] Barker Report

The Barker Report[1] proposed solution to the problems faced in 2006 is to :

  • dramatically increase housebuilding to clear the backlog of 2-3 million missing homes in late 2006.

while proposed mechanisms to achieve this include

  • abolishing planning departments and greenbelt designations,
  • re-introducing controls on immigration to bring net immigration down to as low as possible (ideally ensuring no more population increase in the UK).

It has been stated that 2 million new homes are needed over the 5 years to 2012 just to clear most of the existing shortage of homes.

[edit] Other solutions

  • Reducing Stamp duty. As a tax on the sale of houses, it makes the market more inflexible and increases prices.
  • Deregulation: reducing the amount of red tape on builders would both increase supply, cutting prices and increasing the quantity, but also make supply more responsive to demand.
  • Immigration: increasing the amount of immigrants allowed into the country could reduce the effects of the lack of skilled labour. However, the immigrants themselves would need houses.
  • Home Information Packs function as a tax on supply, decreasing the number that will be sold. This is especially so as they must be paid for in advance, when it is not certain the house will be sold. Scrapping HIPs would avoid making the situation worse.

[edit] Affordability ratios

A number of ratios have been developed to judge the sustainability of house prices.

  • Proportion of Average Income.

[edit] History

Reports after the sub-prime crisis show prices falling. [5]

[edit] Homes worth more than £1 million

Halifax estimates that in 2007 there are 88,000 homes valued at more than £1 million in England and Wales, up from 30,000 in 2002. In London, million pound sales are centred on Kensington and Chelsea. There are other clusters around Cobham, Esher and Weybridge in Surrey and around Altrincham, Macclesfield and Wilmslow in Cheshire.[6]

[edit] References

  1. ^ http://www.nhbc.co.uk/Newscentre/Library/filedownload,28930,en.pdfPDF (6.60 KiB)
  2. ^ http://www.nationwide.co.uk/hpi/downloads/UK_house_prices_adjusted_for_inflation.xls
  3. ^ National Statistics Online
  4. ^ Growth in buy-to-let faster than market as whole, says CML
  5. ^ Shock report shows steep house price fall | This is Money
  6. ^ "Number of £1 million homes 'has trebled in five years'". Retrieved on 2007-10-01. 

[edit] See also

[edit] External links

[edit] Government Reports/Responses

[edit] Other