THE UK HOUSING MARKET
Chapter One
1.0 Introduction
To properly introduce the topic of this research it would be important to look at the housing market in general from the buyer’s perspective. The housing market accords buyers various advantages key among them include the sense of ownership and belonging. Secondly buying a house is a long term investment which will save cost in the future and mostly after retirement, a survey conducted on the buyers in the UK housing market show that most of them prefer buying their own houses so as to avoid paying rent after they retire from formal employment. The housing market can also accord buyers with entrepreneurial mind; capital gains in that the prices of their houses are set to appreciate over time, meaning that they can resell their houses back to the market with a higher price than they initially paid. A home owner can use his or her house to get a secured loan from a financial institution whereby the house will be used as collateral for the secured loan, this loans are usually offered at a lower interest rate due to the fact the level of risk is lower. According to numerous economists, the home buyers in the UK are set to benefit from low interest rates that they will have to pay in the future for their mortgage this is because the government has so far being able to maintain inflation at a considerably low level.
Critics of the housing market and in particular that for UK argue that buying a house in there could be very expensive since as it has been observed prices of houses have been on the rise dating back to 1952. Secondly industry experts lament that the real estate agents are mostly in the habit of increasing the value of houses beyond their true value so as to get high commissions, this has continued to lay more financial burden to home buyers in the UK. Thirdly there are additional cost that are incurred when one is buying a house such as home insurance, mortgage indemnity protection among others which increase the overall cost of buying a house. Lastly the cost of initial 10% deposit is high and will require a long term saving by the buyer
(Andrea and Claudio, 2010)
This research is commissioned to identify and analyze how the recent economic recession affected the housing market in the United Kingdom and in particular the London market, secondly the paper will forecast on what will happen once the UK government policies on housing benefits are introduced.
1.1 Problem statement
The housing market in the United Kingdom had witnessed a tremendous boom in the past few decades; however at the onset of the financial meltdown witnessed in the period of 2007 to early part of 2010, the market experienced financial turmoil that was coupled with fall in housing prices at the market. Survey conducted by Chartered Surveyors suggests a decline in these prices even in the long run. Consequently many investors in the market suffered from major losses due to the low market prices that were not event at par with the cost initially incurred. Financial institutions incurred heavy losses brought about by the numerous loan defaults by borrowers who failed to repay their mortgage. This also commonly referred to as the subprime crisis whose mainly contributing cause were the financial derivatives offered to house buyers whom couldn’t secure the ordinary loan from conventional financial institutions such as banks. It is important to note that the key cause to UK’s housing market bust was the economic recession of 2007 to 2010.
According to Peter and Holmans (1997) the London housing market is coupled with numerous problems, one among them being the difficulty by first time buyers to venture into the market this is so because the prices have been on a steady decrease while the income per capita of London residence has not significantly increased to match the rising prices of houses there (Peter and Holmans, 1997).
According to population statistics from the government’s official website London households and population have been on a steady increase ever since 1971 and it is projected to further increase up to 2016. The increase in population has resulted to high demand on houses in London whereas the supply is very low reason being there is limited land space where new houses can be constructed in order to match the demand.
The other problem with the London housing market is that it is largely dominated with investors who are speculators. The market is considered a good investment place due to the significant high prices of houses consequently speculators have been attracted to buy houses there with a view that the price will increasing significantly in the future and they earn high capital gains. This trend of investment has squeezed the market by increasing demand and at the same time increasing the likely hood that the prices will fall significantly.
According to the report released by the National Federation of Housing Associations (NFHA), it states that the affordability of houses in the rental sector of the London housing market is still a problem and that it has led to shortage of housing for key public sector workers. The city has been diversely affected by this due to shortage of public sector workers, meaning that there is under provision of important public services.
1.2 Project aim
Some evident reasons for fluctuations in the housing are the changes in the mortgage and interest rates. Tighter lending by banks and building societies following the credit crunch have also had a major effect. The Government has framed certain policies in the past and recently which are sometimes overlooked. But these are also responsible to a certain extent. This project is aimed at showing the effect of these and other unconventional factors on the housing market and the extent to which these factors affect house prices.
1.3 Layout of the study
Introduction – In this chapter i will explain the research problem or issue and describe the purpose of the research in terms of my aims and objectives. I will provide background information in terms of the academic and business context.
Literature review – Building on the preliminary literature review in my proposal, I will provide a critical analysis of the existing body of knowledge on the problem or issue I have chosen to investigate and refer to the main theories and other explanatory models.
Methodology – Building on the chapter I wrote in your proposal, I will explain and justify my methodology, methods for selecting a sample or cases, collecting research data and analysing it. Later in the dissertation I will conclude by explaining the limitations of my research design and problems I experienced.
Results/Findings and discussion – In this chapter I will present the analysis of my research data and interpret my results/findings in the context of the literature I reviewed in Chapter 2.
Conclusions and recommendations – In this final chapter I will discuss the implications of my results/findings in the context of my research question(s) and comment on any limitations. You will conclude by making several practical recommendations based on my results/findings.
1.4 Research objectives
1. To identify the main economic factors affecting house prices
2. Identifying the impact these economic factors has had on the housing market and their relevance to the market in UK, more in particular in London.
3. To identify government policies on the economy and their impact on housing prices
4. Identifying the consequences of the introduction of housing benefit cap in April’s government reform
1.5 Research question
How has the recession affected the housing market in the United Kingdom, particularly London?
What will happen once government policies on housing benefit is introduced?
1.6 Research hypothesis
Hypothesis 1: There are underlying economic factors that lead to the booms and busts in the UK housing market.
Hypothesis 2: The government through its policies can also influence the movement in house prices in the UK economy.
1.7 Conceptual framework
When referring to the London’s census report, it is noted that there are over three million households in that city with the percentage of houses that are newly built representing a very small percentage when compared to demand for housing. In 2007 before the economic recession worsened the average price for a house in London could be in the range of 351,000 pounds. Locations within the City where prices of houses are most expensive are Chelsea and Kensington where the average cost of prices is roughly 918,000 pounds. The cheapest locations where prices are considerably low are Dagenham and Barking where the average price of a house is 181,000 pounds. The source of above mentioned facts is the WEBSITE: mortgageguideuk.co.uk.
According to John and Jiao (2008) from a national perspective the housing prices in the UK increased by almost 200% in the period of 1996 to 2007. Housing prices in the Northern Ireland rose by 458.6% in the same period while those in London shot up by 310% during this period. Increase in prices in other regions of the country ranged from 194.5% to 266% for Scotland and Outer South East (John and Jiao, 2008). Appendix (b) shows movement of house prices in different regions from 2000 to 2010 that include: UK, England, London, South East and Scotland.
Important to note is that the UK housing prices were at their peak level in the third quarter of 2007, before they started to experience a downward trend attributed to the economic recession witnessed, increased interests rates and tightening of the lending conditions. Also the regions that experienced the highest price increase during the boom generally had the biggest price falls in the period of 2007 to 2009.
According to the global property guide financial overview, the housing prices in United Kingdom are set to decline this year due to the planned government reduction on spending and also reduction investments in the mortgage market. This comes in the backdrop when prices bottomed out in year 2009, after declining for two years in row. This fact can be substantiated by the prices changes recorded by three major housing agencies on their seasonally adjusted financial reports; they include Halifax, Nationwide and Land registry. The records show a downward trend in housing prices since the third quarter of 2010. A report released by the Bank of England, titled as “October 2010 trends in lending report” also predict a fall on housing prices in the market largely due to the difficulty in accessing mortgage loan and the looming cuts in the treasury budget. The reduction in spending is aimed at reducing the country’s deficit balance of 81 billion pounds by 2015 and in order to meet this objective the government plans to do away with 500,000 jobs in the public sector within the next four years and also raise the retirement age to 66 by the year 2020 (Stephen, 2004).











