STRATEGIC AND INNOVATIVE

MARKETING
MBA 1 (A)

ASSIGNMENT

UK HOUSE PRICES

PRESENTED TO:

Ms. Ellie Semsar

Sheikh Saeed

AUGUST 2009

LONDON SCHOOL OF COMMERCE

otes for visitors

It is ensured that all information we provided through this document is

correct at the time of publication. The author of this document apologises
for any errors and therefore do not guarantee the accuracy of these pages.
Any visitor using information contained in them does so entirely at their
own risk.

This work is for information and review purposes only, republication and
reprinting of the document may infringe the copyrights of the documents
and the contents provided in the text. The visitor infringing the copyrights
of the author(s) will do so at their own risk.

Intentions of the publisher is to provide the basic input for the guidance
of the students, it do not mean to use short-cuts while preparing any
academic document.

Visitors are advised to review as much academic text as possible along

with this document. The review of original knowledge base enhances and
develops the reading, writing and analytical skills of the students which in
turn is essential for business or career development.
MBA –SAIM June – September 09

ASSIGMET
Analyze:

the changes in house prices over the last two years and,

predict what is likely to happen to the market over the next year or two.

To get details you could enquire in estate agents or building societies.

The Halifax publishes quarterly leaflets on house prices, so too do newspapers.

You could, for instance, try looking up the topic in

The Times Index or
The Economist Index (which you could find in the libraries).
Economic Trends (ONOs) gives monthly data on the prices of new houses.

John Sloman ‘Economics, Fourth edition’, Appendix 1 has also a list of useful websites.

a) Plot a time-series graph showing the movements of house prices.

b) Identify factors over the period that have caused the demand and/or supply
curves to shift. Draw diagrams to illustrate your analysis here.

LIMIT: 2200 - 3000 WORDS

--------------------------------------------------------------------------------------------------------------------------------------------

Your essay should meet the following expectations:

Answer the question set and keep to the topic.

Demonstrate an understanding of relevant economic principles, concepts and theories;

Ability to provide insightful analysis of issues involved;
Ability to organise material with supporting evidence;
Skills in using diagram to explain economic ideas;
Knowledge of current issues relating to your assignment question;
Evidence of thorough research.

Include an introduction in your opening paragraph and a conclusion in the final one.

Attach a bibliography of the books and journal articles used in the assignment. If there is
sufficient evidence to prove that the essay has been copied from another student or from a
book without proper acknowledgement of the sources (plagiarism), such an essay will
receive a fail grade.

Adhere to the word limit.

Font size: 12
Spacing: 1.5-spaced

London School of Commerce (UK) 1

UK Housing Prices

Table of Contents

INTRODUCTION 1

How people buy Houses 3

House Prices since last two years 6

Credit Crunch & Recession 6

FACTORS EFFECTING UK HOUSE PRICES 7

1- Availability of Mortgage Finance 7

2- Unemployment 9

3- Expectations of future House prices 11

4- Population 13

5- Interest rates 15

6- Rental housing (London) 16

7- DECLINE IN INCOME 17

PREDICTIONS FOR NEXT TWO YEARS 21

Mortgage Lending 21

Interest Rates 21

Affordability 22

Unemployment 22

Conclusion: 23

REFERENCES 24

INDEX 26

- 36 -

UK Housing Prices

ITRODUCTIO

Every individual in an economy make choices to overcome the inability to satisfy all
their wants. The scarcity of goods and services in every economy and the incentives
that encourage or discourage an individual, in terms of reward or penalty, is the basis
of economics studies. This phenomenon of scarcity leads individuals, businesses,
government and entire society to make choices on the basis of incentives associated
with alternatives available to fulfil wants. Trading off between such alternatives
determine the economic value of the want, which is opportunity cost of the highest
alternative forgone during process of making a choice. (Parkin, 2008)

The market provides the mechanism to facilitate the trade off between buyer and
seller of the goods and services, or in economics term wants and resources. Market
could be physical or in shape of legal frameworks of operations. Competitive market
is the one with many buyers and seller; with no influence on prices form any
individual buyer or seller. Demand and Supply of goods and services in such markets
determine the prices and the available quantity of the goods in an economy. Housing
market like any other market is a competitive market where both buyer and seller
respond to trade off the opportunity costs of other choices available. (pp. 58)

Housing is one of the largest industries in UK. The supply side of housing market in
UK consists; housing associations, private developers and government authorities (i.e.
local councils & government agencies). However, typically individual owners who
are selling their houses for capital gains or for other reasons are largest player in
supply of houses. Demand side of the houses include first time buyers of the houses
as well as individual and commercial investors speculating gains from resale
proceeds. (Halifax)

We will analyse the factors affecting equilibrium prices in house market since 2007 to
now. A separate analysis of this type will be carried out to predict the future prices of
the houses based on the same factors effecting future demand and supply.

- 1 -

UK Housing Prices

SUPPLY & DEMAND OF HOUSES

HOUSES

A classic example of microeconomics is the determination of house prices in housing

markets, where the interaction between buyers and sellers determine the equilibrium
prices for transaction. The demand and supply side factors determine the value of
properties in a market. Housing transaction in the UK depends on the price that the
seller is willing to agree for their property with the prospective buyer and the actual
price that the buyer is willing and able to pay. The buyers place offers for a property
that the seller can either accept or reject.

Supply Market: The balance of power in the market shifts towards the seller or
supplier, when the market demand for houses is high and there is a shortage of houses
(i.e. scarce supply). Supplier wait for offers on their house to reach (or exceed) their
minimum selling price.

Demand Market: When demand is weak and when there are number of houses
available on the market, the control on the house prices switches to potential buyers.
As a result of excess supply of houses buyers negotiate price that are lower than the
expectation of seller.

Supply of available housing in the market is often relatively inelastic, because of the
time lags between a change in price and an increase in the supply of new properties
becoming available, or other homeowners deciding to put their properties onto the
market. When the demand for houses increases due to certain factors, there is upward
pressure on market prices. As supply becomes more elastic over time, a downwards
pressure on prices is seen resulting in a further increase in the equilibrium quantity of
houses bought and sold.

- 2 -

UK Housing Prices

HOW PEOPLE BUY HOUSES

As the house prices are way beyond the reach of most of the population, the bank and
building societies provide lending for mortgaging the houses for buyers. The sellers
receives its money from mortgage lender, which in turn charges buyer an interest for
long term repayment of the money paid for purchase. Bank and building societies like
Halifax, Nationwide and Northern Rock are biggest mortgage lenders in UK. These
mortgage lenders generate funds through borrowing form other financial institutions,
particularly from USA money market. The figure 2 represents the mortgage lending
mechanism.

Figure 1

HOUSE PRICES INDECES

There are three house price indices in UK (i.e. Halifax, Nationwide & Land Registry),
giving slightly different figures for the annual rate of decline in the housing market.

- 3 -

UK Housing Prices

Since 1975, property prices have increased in the UK by approximately 3% a year1.

However, at least every 10 years they usually suffer a dramatic fall, often coinciding
with economic problems. For example, during the recession of the early 1990s prices
fell, and in 2008 prices had a dramatic fall, caused by fears of recession primarily and
infamous ‘credit crunch’. During this period of rapid growth, property prices rose and
fell slightly when various factors caused buyers to hold off buying for a short period
of time.

The historic price data of all UK houses provided by Nationwide Building Society is
shown in the following time series.

1
Nationwide Building Society, using Real House Prices

- 4 -

UK Housing Prices

UK House Price data

House Prices
200,000
180,000
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0

Q 4 1998

Q 4 1999

Q 4 2000

Q 4 2001

Q 4 2002

Q 4 2003

Q 4 2004

Q 4 2005

Q 4 2006

Q 4 2007

Q 4 2008
Year

- 5 -

UK Housing Prices

ANALYSIS OF UK HOUSE PRICES

HOUSE PRICES SICE LAST TWO YEARS

UK housing market have seen ups and sown in last few years, with unimaginable
property boom to a historic decline as a result of credit crunch. The forces behind
decline in house prices in UK started in summer 2007 as a result of credit crunch in
financial market. In November 2007 Nationwide reported a prices drop of 0.8% in,
the largest monthly fall over more than 12 years. The fall almost reverses the 1.1%
growth recorded in October and added to the weight of evidence that the market will
be grinding to a halt.

CREDIT CRUCH & RECESSIO

The credit crunch refers to a sudden shortage of funds for lending, leading to a
resulting decline in loans available. A Credit Crunch can occur for various reasons;
however the recent one occurred due to drying up of funds in the capital markets. This
was driven by a sharp rise in defaults on subprime mortgages. These mortgages were
mainly in America but the resulting shortage of funds spread throughout the rest of
the world including UK. House market in UK has been severely affected by the Credit
crunch, changing the whole dynamics of the market.

UK housing industry is primarily high demand market due to severe shortage of new
house development and growing population. Fears of economic recession and credit
crunch have shifted the equilibrium of the market from supplier’s side to buyers and
eventually from shortage to surplus houses.

UK housing industry is primarily high demand market due to severe shortage of new
house development and growing population. Fears of economic recession and credit
crunch have shifted the equilibrium of the market from supplier’s side to buyers and
eventually from shortage to surplus houses. (Council of Mortgage Lenders)

- 6 -

UK Housing Prices

FACTORS EFFECTIG UK HOUSE PRICES

1- AVAILABILITY OF MORTGAGE FIACE

According to Bank of England (BOE) the number of new mortgage approvals in the
UK fell by over three-quarters from summer 2007 to the end of 2008. The largest
proportional fall was in loans by specialist lenders, which accounted for 30,000 loans
a month in summer 2007 but just 1,000 a month in winter 2008. This category
accounted for a substantial proportion of sub-prime and buy-to-let lending. (Greater
London Authority London housing market report - March 2009)

Bank of England data shows that house mortgage numbers decline from 120,000
mortgage approval a month to less than 30,000 from Jan 2007 to Nov 2008.

- 7 -

UK Housing Prices

Approval for Mortgages for House purchase

140.0
M ajor UK lenders
Total
120.0

100.0
Numbers in Thousands

80.0

60.0

40.0

20.0

0.0
7

07

08

08

9
7

9
07

08

09
7

9
l-0

l-0
-0

-0

-0
-0

-0
-0

-0

-0
p-

p-
l-
n-

n-

n-
ar

ar

ar
ay

ay

ay
ov

ov
Ju

Ju

Ju
Se

Se
Ja

Ja

Ja
M

M
M

M
N

N
BOE reports that the mortgage lenders reduced lending due to falling house prices and
fears of negative equity. Expectations for house prices were reported to have been a
factor contributing to these tightening criteria for lending. Demand for lending for
house purchase also declined than lenders had anticipated. Lenders expected that
demand for secured lending for house purchase would fall further. (BOE Credit
Condition Surveys)

Mortage Lending
25.0
House purchase
Remortgaging
Other
20.0
Gross lending
Net lending

15.0
£ billions

10.0

5.0

0.0
7

9
07

08
07

08

09
7

9
07

08
l- 0

l- 0

l- 0
-0

-0

-0
-0

-0

-0
p-

p-
n-

n-

n-
v-

v-
ar

ar

ar
ay

ay

ay
Ju

Ju

Ju
Se

Se
Ja

Ja

Ja
No

No
M

M
M

Gross mortgage lending declined to an estimated £9.9 billion in February 2009, down
15% from £11.7 billion in January and 60% from February 2008 (BOE data, CML).
The lack of mortgage finance is one of the most significant factors in falling demand
for housing. The Council of Mortgage Lenders suggests that mortgage approvals have

- 8 -

UK Housing Prices

fallen to the lowest levels since 1991. Upton July 2007, mortgage lenders were very
competitive and eager to attract customers with mortgage products such as 100%
mortgages and high income multiple mortgages. (CML) However, the credit crisis
has led to banks struggling to raise finance; therefore they have had to reduce their
mortgage lending.

To ration mortgages, mortgage lenders have removed many mortgage products,

especially 'subprime' products and have also increased the cost of many other
mortgages. In particular, mortgage lenders are requiring large deposits. This makes it
difficult for first time buyers to get a mortgage. As the houses are bought using a
combination of a deposit and an advance, the larger the deposit required, the more
difficult it is to buy a house. First-time buyers are most likely to be sensitive to the
size of deposits, typically being younger with fewer savings and without housing
equity and so housing market demand is reduced. (CML Affordability Dean Garratt,
Economist, Council of Mortgage Lenders)

The factors relating to house mortgage availability resulted in downward shift in

demand curve.

2- UEMPLOYMET

Since last quarter of 2007, economic slow down and significance decrease in business
activity due to financial crisis have resulted in growing unemployment in UK. With

- 9 -

UK Housing Prices

the appalling news of UK falling into economic recession, the business activities have
further shrunk. Comparing with second quarter of 2007, unemployment has reached
nearly 7.8% from below 5.5% figures of 2007. Latest figure of unemployment
released in August 2009, show about 2.44 million people out of work - up by 220,000
unemployed on the quarter and 750,000 from this time last year.

Inverse relationship between quarterly unemployment rates compared to real house

prices is shown below. House prices have been adjusted for inflation and are given in
2009 Q1 prices.

As purchasing a house takes place with borrowing loan from a mortgage lender and
undergoing a long-term commitment to repay the loan. An increase in unemployment

- 10 -

UK Housing Prices

in UK has decreased the demand for buying a house resulting in shift o f demand
curve.

3- EXPECTATIOS OF FUTURE HOUSE PRICES

If expectations for the future performance of the economy deteriorate and people
become less optimistic about their own financial circumstances, they are tempted to
curtail their search for a new home or delay entry into the owner-occupied sector. The
Nationwide Consumer Confidence Index decreased from 100 to 45 since September
2007, reflecting the buyer’s expectation about future house prices.

A survey conducted by Nationwide revealed that consumer expectations of future

trends in house prices can fuel bubbles or prolong slumps. According to this survey,

- 11 -

UK Housing Prices

expectations of further falls in house prices are highest in London and neighbouring
regions. 64 per cent of London respondents expect house prices to be lower in 6
months and just 7 per cent expect them to be higher. (GLA)

Consumers' expectations of direction of house prices in 6 months (January 2009)

Present Situation Index reflects sentiment about the current economic and
employment situation. This Index decreased by one point in July to 16. The
proportion of consumers that believe the current economic situation is good increased
by two percentage points on the previous month to 6%. The numbers of consumers
who believe there are now few jobs available increased by 6% to 74%. (Nationwide)

Source: ationwide

- 12 -

UK Housing Prices

Future expected prices of houses are one of the main reasons behind movement of
demand and supply curves of housing market. In a growing economy, suppliers
consider houses as durables providing a flow of services over a long period or they to
secure a financial gain due to appreciation in prices. However, in economic downturn,
this picture is flipped upside down. The fear of negative equity resulting from house
price deflation prevent buyer from investing in housing. Speculation in market
regarding over last two years have reduced the demand and hence the house prices.
The seller, in expectation of higher future prices, deferred to sell houses during this
period, shifting the supply curve rightwards. The changes in supply and demand
curves are shown below.

4- POPULATIO

UK population is rising faster than the number of houses available due to high
fertility, improved life expectancy, and net immigration. Immigration and emigration
have increased since 2002; this has contributed to net international migration
increasing to 198,000 in 2007, an increase of 36 per cent on the mid 2002 figure of
148,000. (Dept of Nat Stat)

Even worse the increased demand is for smaller households such as one and two
bedroom properties, as people are getting married later and, with an ageing population

- 13 -

UK Housing Prices

also want to downsize to smaller properties. (communities.gov.uk)

Demand of houses depends on the size and age structure of the population. The larger
the population, the greater the demand for the housing needs of the population. Rapid
increase in UK population shifted house prices demand curve to right.

In economics, normal goods are any goods for which demand increases when income
increases and falls when income decreases but price remains constant, i.e. with a
positive income elasticity of demand. The UK housing market falls into normal goods
category.

WHY: Before financial crisis of 2007 we have seen this trend in UK housing market;
however the impact of other factors influencing the housing market was

- 14 -

UK Housing Prices

overwhelmingly dominant, that’s why despite increase in population of the period

demand has not shifted outward.

5- ITEREST RATES

Interest rates have been at an all time low in the last 10 years and are currently at a
historic low. In the last recession when house prices fell, people couldn’t afford a
mortgage due to interest rates rising as high as 15%! In the last 10 years, interest rates
have fluctuated around 5%, allowing people to afford to pay more for property.

Shortly after financial crisis Bank of England started reducing interest rates in order
boost the housing market. This trend can be seen in time series graph below, showing
a sharp fall in interest rate particularly since August 2008. (BoE)

UK Interes t Rates

7.0%

6.0%

5.0%
Interest Rate (%)

4.0%

3.0%

2.0%

1.0%

0.0%
03

04

05

06

07

08

09
3

8
-0

-0

-0

-0

-0

-0
b-

b-

b-

b-

b-

b-

b-
ug

ug

ug

ug

ug

ug
Fe

Fe

Fe

Fe

Fe

Fe

Fe
A

Time

Interest rates are one of the constituent costs of the house mortgage lending. Decrease
in interest rate result in decrease in the overall cost of mortgages. Therefore decrease
in interest rate should increase the demand of mortgages from buyer’s perspective.
The demand of houses curve of houses should shift rightward.

- 15 -

UK Housing Prices

However we have not seen this any such increase in quantity of houses demanded.
This is primarily due to negative sentiments in the housing market prevailing since the
financial turmoil. The impact of decrease in interest rates has not been transferred to
mortgage interest rates. Lenders are hesitating to offered buyers mortgages at low
interest rates due to their week of liquidity. (Bank of England)

6- RETAL HOUSIG (LODO)

Successive surveys by the GLA suggest that average rents were relatively static in
London between 2002 and 2005 (in stark contrast to house prices) and have risen
steadily since then, at least until late 2008. Data from the Association of Residential
Lettings Agents suggest that in the last quarter rents have fallen and voids have risen
in London, as the supply of properties coming onto the market (largely due to the
sales market slump) is exceeding demand. The latest RICS residential lettings survey
also finds that market rents are expected to fall further in London. (GLA, Housing
market report 2009).

- 16 -

UK Housing Prices

Rental property is the substitute for the house mortgage therefore it affects the supply
as well as demand curves of the house prices. Increase in the quantity demanded of
rental properties will change the demand leftward. As the supplier of rental property
and property for sale are same, the increase in supply of rental property will decrease
the supply of properties for sale. Therefore the supply curve of houses for sale will
shift downward as shown below:

7- DECLINE IN INCOME

Table below shows the house price to earning ratio of buyers.

- 17 -

UK Housing Prices

House Price to Earning

6.0

House Price Earning Ratio 5.0

4.0

3.0

2.0

1.0

0.0
2006 Q2

2006 Q3

2006 Q4

2007 Q1

2007 Q2

2007 Q3

2007 Q4

2008 Q1

2008 Q2

2008 Q3

2008 Q4

2009 Q1

2009 Q2
Time (Quaterly)

Privately owned housing in UK is a ‘normal good’ for most people. Therefore

decrease in average real income of the population, reduces the total demand for
housing and in turn it lowers the demand for more expensive properties as people
looks to move affordable alternatives.

AFFORDABILITY OF MORTGAGE

Because houses are bought using a combination of a deposit and an advance, the
house price to income ratio comprises two constituent parts: the deposit to income and
advance to income ratios. Both are fundamental in determining the amount house
buyers are able to borrow. The larger the deposit required, the more difficult it is to
buy and so housing market activity is depressed. Furthermore, first-time buyers are
most likely to be sensitive to the size of deposits, typically being younger with fewer
savings and without housing equity, and this may prevent them from entering home-
ownership when they want to. Table 3 shows the deposit and advance to income ratio
by region and type of buyer for 2000.

As expected, the average deposit to income ratio was highest in southern England. For
first-time buyers the largest deposit relative to income was required in the South West
while for former owner-occupiers London required the largest deposit. House
purchasers in Scotland saw the smallest deposits in relation to income across both
first-time buyers and movers. Indeed, for movers purchasing in Scotland the average

- 18 -

UK Housing Prices

deposit was 73% of income, less than half the 155% required in London.
(Affordability Dean Garratt, Economist, Council of Mortgage Lenders)

Affordability Index is measure initial mortgage (Initial mortgage payments calculated

using new lending interest rate (source: CML) for a loan 90% of the typical FTB
house price) payments as a percentage of take home pay. It is measured relative to the
average in 1985, a higher index values indicate improved affordability of purchasing a
house. The table below shows a downward trend in affordability index since last
quarter of 2007.

The number of new mortgage approvals in the UK fell by over three-quarters from
summer 2007 to the end of 2008, broadly stabilising at about 30,000 a month. The
largest proportional fall was in loans by ‘other specialist lenders’, which accounted
for 30,000 loans a month in summer 2007 but just 1,000 a month in winter 2008. This
category accounted for a substantial proportion of sub-prime and buy-to-let lending.(
Greater London Authority

London housing market report - March 2009)

- 19 -

UK Housing Prices

First Time Buyers Affordability

140.0

120.0

100.0

Affordability
80.0

60.0

40.0

20.0

0.0
2006 2006 2007 2007 2007 2007 2008 2008 2008 2008
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Time (Quarterly)

BOE reports tha the banks have reduced leding due to falling house prices.
http://www.bankofengland.co.uk/publications/other/monetary/creditconditions.htm

A decrease in the Affordability Index shows that an average buyer is less able to
afford the median priced home. A drop of 29.1 points in affordability is observed
since third quarter of 2007.

- 20 -

UK Housing Prices

PREDICTIOS FOR EXT TWO YEARS

Housing Market is undergoing a painful readjustment with falling prices and

exceptionally low transaction volumes. This reflects the UK economy which is
experiencing a recession and quick rise in unemployment. There is a strong link
between the housing market and UK economy. One of the main factors behind the
current recession is the falling house prices. Decrease in house prices results in
decreased consumer spending, which in turn reduces confidence in economy and
people can no longer re-mortgages. The deteriorated economy is making the house
price fall into downward spiral.

MORTGAGE LEDIG

Mortgage lending is currently at an all time low. The government is trying to put
pressure on banks to revitalise mortgage lending. Whether this is successful will have
a big bearing on the future of the housing market.

New data from the Council of Mortgage Lenders shows further signs of stabilisation
in the mortgage market, but transactions are still weak on a historic basis. Lending for
house purchase and remortgaging both increased in June, but with very low levels.

There were 45,000 house purchase loans, worth £5.9 billion, up 23% from 36,500
loans in May. However, this is less than half the average number of loans in June over
the last seven years. (BoE) A total of 116,700 house purchase loans were advanced in
the second quarter, a 50% increase from the preceding three months but down 22%
from the second quarter of 2008. (Council of Mortgage Lenders, quarterly report
2009)

ITEREST RATES

Interest rates are very low, so the cost of mortgages should not be a problem. Some
fixed rate mortgages are going for as low as 3%. The problem is banks are still
reluctant to lend mortgages because of the shortage of their cash flow. Some banks
even complain that low interest rates make it difficult to attract savers and therefore

- 21 -

UK Housing Prices

have enough to lend.

The number of loans for remortgage increased by 13% from May to 34,000 loans in
June. But low interest rates have dampened demand for remortgaging in the second
quarter with 96,000 remortgage loans, a 21% fall from 122,000 in the previous
quarter. (BoE)

Fixed rate deals have increased in take-up throughout the second quarter and by June
made up 78% of new lending, the largest share since June 2007. This appears to be
supply-driven, reflecting the more widespread availability of fixed-rate products in
the marketplace. (Council of Mortgage Lenders, quarterly report 2009)

AFFORDABILITY

Another key issue is the affordability of housing compared to renting a house. With
house prices falling fast (10-15%) purchasing is becoming more affordable for first
time buyers. As house prices continue to fall, it will start to tempt more people back
into the housing market.

Affordability measures for homebuyers were broadly static in June, but the tightening
in criteria since the onset of the credit crunch appears to have ended. The typical first-
time buyer had a 25% deposit, unchanged since February. Home movers typically
borrowed 69% of the property’s value, unchanged from April. (Halifax)

Income multiples have also started to increase modestly, with the typical first-time
buyer borrowing 3.08 times their income, compared to 3.04 in May, and home movers
typically borrowing 2.76, compared with 2.74 in May. (Council of Mortgage Lenders,
quarterly report 2009)

UEMPLOYMET

With unemployment forecast to rise to 3 million because of deepening recession,

many people will be deterred from buying a house in current climate of uncertainty. It
is hard to imagine housing market picking up with output continuing to fall and
unemployment rising. Unemployment being a lagging indicator meaning
unemployment will rise even when economy starts to pick up.

- 22 -

UK Housing Prices

Analysts urge that there was still a great deal of uncertainty in the global economy
and unemployment in the UK would continue to rise over the coming months while
the recovery takes time to spread to all sectors of the economy. Official data yesterday
showed that both the French and German economies grew by 0.3 per cent between
April and June.

COCLUSIO:

The UK housing Market has a tendency towards being very volatile. The problem
with this volatility is that it creates the potential for collapsing house prices. (Council
of Mortgage Lenders) Paul Samter an economist at Council of Mortgage lenders
predicts that “Low interest rates and realistic selling prices have helped generate a
welcome increase in transactions. But there is some way to go before we reach
normal levels of activity.”

The Chamber of British industries the recession worsened more quickly than expected
in the first three months of 2009. It expects the speed at which the economy is
contracting to slow in the second half of this year. The recovery is predicted to be
“slow and fragile”, with growth in GDP beginning again in spring 2010.

The problem is that it is not easy to stabilise house prices. However on the basis of
above analysis it is predicted that house prices will remain steady for next two years,
if not fall further.

- 23 -

UK Housing Prices

REFERECES
• Parkin, Powel, Mathews; 2008, Economics, 7th Edition, Addison Wesley
• Outline of Theory and Problems of Principles of Economics (Second Edition),
McGRAW-HILL
• Economic & Labour Market Review | Vol 1 | No 1 | January 2007, Office for
National Statistics
• The London Housing Strategy – draft for public consultation: integrated
impact assessment, June 2009. Greater London Authority
• London housing market report - March 2009, Greater London Authority,
• Land Registry, House Price Index, Date of release: 28 July 2009
• Strategic Housing Market Assessments (SHMA) 2007, Communities and
Local Government (CLG)
• Credit Crunch and the Profitability matters, May 2009, GLA Economics.
• Market Report, 2009, Key Note August 2008, 17th Ed.
• Various online publications, Council of Mortgage lenders
• Various online publication, Bank of England,
• Various online publication, Nationwide plc
• Various online publications, Barclays and Halifax
• Office of National Statistic, online resources
• www.landregistery.gov.uk
• http://www.bankofengland.co.uk/publications/other/monetary/creditconditions
.htm
• http://www.datamonitor.com/store/Product/consumer_trends_in_the_uk_mort
gage_market?productid=BFFS0685
• http://www.marketoracle.co.uk/Article1893.html
• http://www.statistics.gov.uk/STATBASE/Product.asp?vlnk=3592
• http://www.communities.gov.uk/housing/housingresearch/housingstatistics/ho
usingstatisticsby/housebuilding/publicationsonhousebuilding/
• http://www.marketoracle.co.uk/Article4855.html
• http://www.uk-ouseprices.co.uk/housing_market/factors_affecting_prices.html
• http://www.homes-for-rent-uk.org.uk/main/factors-affecting-prices.htm
• http://www.housepricecrash.co.uk/forum/lofiversion/index.php/t119061.html
• http://www.timeout.com/london/property/features/4352/The_future_of_Londo
n-s_housing_market.html
• http://www.telegraph.co.uk/finance/financetopics/recession/5823728/UK-
house-prices-history-suggests-it-wont-be-until-2016-that-they-recover-to-pre-
boom-level.html

- 24 -

UK Housing Prices

• http://www.financialsense.com/fsu/editorials/walayat/2008/0208.html
• http://www.nationwide.co.uk/hpi/historical.htm
• http://www.lloydsbankinggroup.com/media1/research/halifax_hpi.asp
• http://www.houseweb.co.uk/house/market/irfig.html#2009

- 25 -

UK Housing Prices

IDEX
UK House Price quarterly data
Source: Nationwide

- 26 -

UK Housing Prices

UK House Prices: Historical Data

Source; Halifax

All Houses, All Buyers (Seasonally Adjusted).

The annual change numbers are the quarterly year-on-year figures. These figures
provide a better picture of underlying trends compared to a monthly year-on-year
number as they smooth out any short-term fluctuations. The standardised index is
seasonally adjusted using the U.S. Bureau of the Census XII moving-average method
based on a rolling 84-month series. Each month, the seasonally adjusted figure for the
same month a year ago and last’s month figure are subject to revision. The
standardised average price is calculated using the Halifax’s mix adjusted
methodology.

Index Standardised Monthly Annual Price/

1983=100 Average Price Change Change Earnings
1 £ % %* Ratio
2 3
Period
Jun 2008 583.6 180,320 -1.8 -6.1 5.07
Jul 574.2 177,421 -1.6 -8.8 4.97
Aug 564.1 174,293 -1.8 -10.9 4.87
Sep 556.8 172,027 -1.3 -12.4 4.79
Oct 543.5 167,934 -2.4 -13.7 4.67
Nov 529.0 163,458 -2.7 -14.9 4.56
Dec 520.6 160,861 -1.6 -16.2 4.51
Jan 2009 531.2 164,126 2.0 -17.2 4.65
Feb 519.1 160,390 -2.3 -17.7 4.52
Mar 509.2 157,320 -1.9 -17.5 4.38
Apr 500.0 154,490 -1.8 -17.7 4.26
May 513.1 158,541 2.6 -16.3 4.40e
Jun 510.4 157,713 -0.5 -15.0 4.33e

- 27 -

UK Housing Prices

Mortgage Repayments As A Percentage Of Income

Halifax Mortgage Affordability

- 28 -

UK Housing Prices

House Price - Earnings Ratio (All Houses, All Buyers)

Seasonally Adjusted
Source; HALIFAX plc

- 29 -

UK Housing Prices

UK Interest Rates

Source: Bank of England

- 30 -

UK Housing Prices

First Time Buyer Gross House Price to Earnings Ratios

Source; Nationwide plc

Calculated as the ratio of Nationwide FTB house price to mean gross earnings in each
region. Earnings data is from the ONS Annual Survey of Hours & Earnings, and pre-
1998 the New Earnings Survey; NES data has been adjusted to create a consistent
series. Mean earnings for a full time worker on adult rates are used. Quarterly
earnings data calculated using straight line interpolation; points after last annual
observation extrapolated using average growth rates and hence subject to revision

- 31 -

UK Housing Prices

Unemployed/Employment UK

All: Aged 16+: 000s: SA: Annual = 4 quarter average

Seasonally adjusted
Source; Office of National Statistics, UK

- 32 -

UK Housing Prices

Approvals for mortgages for house purchase

Sources: Bank of England and Lending Panel data

Seasonally adjusted
Thousands

- 33 -

UK Housing Prices

Mortgage lending by the major UK lenders

Sources: Bank of England and Lending Panel data

Seasonally adjusted
Amount in £ billions

- 34 -

UK Housing Prices

FTB Affordability Indices –

Source; Office of National statistics

Mortgage payments as a percentage of take home pay.
First Time Buyer Affordability Indices - Mortgage payments as a percentage of take
home pay. These indices measure initial mortgage payments as a percentage of take
home pay for each region Affordability is measured relative to the average in 1985,
higher index values indicate worsening affordability. Initial mortgage payments
calculated using new lending interest rate (source: CML) for a loan 90% of the typical
FTB house price. Mortgage payments are for a capital repayment mortgage and are
adjusted for MIRAS (Mortgage Interest Relief at Source) where appropriate
Earnings data is from the ONS Annual Survey of Hours & Earnings, and pre-1998 the
New Earnings Survey; NES data has been adjusted to create a consistent series
Mean earnings for a full time worker on adult rates are used. Quarterly earnings data
calculated using straight line interpolation; points after last annual observation
extrapolated using average growth rates and hence subject to revision. Take home pay
calculated using prevailing Tax & National Insurance Rates

- 35 -