Source: Housing and Planning Statistics 2011 published by the
Background
Housing economics is an important contributor to the macroscopic understanding of a country’s economic performance. Originating as a study on social policies after the Second World War, housing economics combines insights from welfare economics and various development theories to determine both efficiency and equity issues of consumers in terms of housing needs and aspirations. However, the complexities of housing – that of housing being an asset, an investment and consumed good makes it challenging to fully comprehend and utilize as a benchmark for exacting economic performance measurements.
The UK Housing Market is composed of privately owned houses, as well as leased houses and apartments. Properties in the UK may also be privately rented or rented by local government agencies. It is also very common in the UK to have properties managed through registered housing associations. The distribution of the UK housing market is shown in the pie chart below.
Figure 1 UK Housing Market (In Million Dwellings, 2010)
Unlike other product (commodity) markets, the housing market enjoys a second-hand transactions aspect that makes the market peculiar. The largest mortgage lender of the UK is the Nationwide Building society and this group claims that an average of only 5% of housing transactions involve newly built properties and the staggering 95% are second hand property transactions. This also means that the stock of new properties being built is falling. The figure below indicates that as of 2006, majority of the new properties made available to the market are built entirely by private groups.
Figure 2 UK New Property Development
Because owning a house is representative of consumer wealth, one of the biggest factors that affect owning a house is the price of houses. Basic economic theory points out that when the price of a house increases, it creates an expansion of a consumer’s asset base which is a wealth effect. Comparing the asset value to whatever mortgages (debt) were acquired to secure the property leads to an increase in property owner equity. Property owners may then try to sell their properties at higher values compared to their acquisition cost, giving them liquidity thereby boosting their purchasing power. The inverse happens when house prices drop. When properties are financed through debt, consumer’s become relatively poorer thus will not be unloading their properties back to the secondary market for fear of taking a loss. Fortunately for property owners, the price of houses in the UK have been steadily increasing in the last 20 years.
Figure 3 The Wealth Effect of Housing
Figure 4 Average Housing Prices in the UK, 1991 to 2009
Figure 5 Average UK Housing Prices by Month (2006 to 2012)
Interest rates are also of very high importance to property owners, since a large portion of the properties in the UK are financed through debt. Although the long term trend for interest rates is upward (increasing rate) the short term interest rate trend is decreasing as shown below. This makes housing more affordable to consumers thus promoting demand for housing properties.
Figure 6 Base Interest Rates, 2007 to 20112
Basic demand and supply theory points out that as the price of a product falls, more of it is demanded by the consumer. The same is true in the case of housing, as the total cost of the product decreases, more of it is required by the market. The demand for housing, using population growth as a basis is shown in the figure below.
Figure 7 Household Demand Projections by Type of Occupant
On a per-period basis, the demand for houses is affected primarily by prices. When prices rice the real income of consumers decrease thus the demand contracts. The “substitution” effect kicks in, which is the identification of suitable substitutes to owning a house (such as rent). The more favourable case for property owners is the rise in house prices, which makes their assets more valuable. Price however, is not the only determinant of demand for houses. Household income, social trends, interest rates, credit availability, customer expectations and the price of substitutes influence housing demand. Supply is influenced by roughly the same factors, with price being the top factor. Other factors affecting supply are availability of land, construction costs, government legislation, availability of subsidies, and technological innovations.
References
Economics Online. 2012. Competitive House Prices. Retrieved from http://economicsonline.co.uk/Competitive_markets/House_prices.html
Communities. Gov.UK. 2012. Housing and Planning Statistics 2010. Retrieved from http://www.communities.gov.uk/publications/corporate/statistics/housingplanningstatistics2010
Statistics.Gov.UK. 2012. Guide to Housing Market. Retrieved from http://www.statistics.gov.uk/hub/people-places/housing-and-households/housing-market
Sullivan, T. and Gibb, K. 2003. Housing Economics and Public Policy. Retrieved from http://course.lixin.edu.cn/course_center/files_upload/7e2f5c17-6822-4054-8b8c-100d5ae11642/content/fcc480e8-ce5f-4f2e-9f85-36590b61a746/content/016/default.files/file.pdf
Tutor2U.com. 2012. A Level Economics. Retrieved from http://www.tutor2u.net/blog/index.php/economics/C9/