Transcript The Housing Market in the UK

Markets in Action:
The Housing Market in the UK
The Housing Market
• Why is Mayfair more expensive than The
Angel Islington?
• What factors influence house prices?
The Housing Market
• The determination of prices in local and regional
housing markets is a classic example of
microeconomics in action!
• Each housing transaction in the UK depends on
– The price that the seller is willing to agree for their property
with the prospective buyer
– The actual price that the buyer is willing and able to pay.
• Buyers place offers for a property that the seller
can either accept or reject
Types of Tenure
•
Owner Occupation: Individuals own their own houses; this
accounts for around 70% of the housing stock in the UK since
1980 when it became possible for people to buy their council
houses
•
Private Rental: Individuals rent from other individuals
•
Social Rental: Individuals rent from the state or local council;
this sector has fallen in importance in the UK since the 1980s
•
Housing Associations: This is a relatively new sector and is, in
fact, a Public Private Partnership (PPP). Combined private
sector finance and public sector funding ensure the provision
of subsidised accommodation for tenants who pay rent.
Recent legislation has encouraged the establishment of such
associations
House Prices
•
In the free market, house prices are determined by demand
and supply.
•
Demand and supply conditions can be different between
regions, causing major differences in house prices.
•
Also, over time conditions can change and this leads to
fluctuations.
•
As houses are the most expensive item of expenditure for
most people in their lives and their main assets, such changes
are very significant in terms of the impact on individuals
income and wealth
Factors affecting demand for owner-occupied housing
•
Income: Demand for housing is likely to be income inelastic.
With more income, people trade up to better houses.
•
Population Trends: population changes and social trends will
have an impact.
•
Price and Availability of Substitutes: Demand for houses will
increase if the price of rented accommodation rises or it
becomes more difficult to find.
•
Mortgages: The availability of people to buy a house will
depend on how easy and expensive it is to get a mortgage.
A mortgage is a form of borrowing in which the property is
used as collateral. The greater the ease of getting the a
mortgage and the lower the cost of borrowing, the higher
the demand for houses will be. The interest rate is crucial here
Affordability of Housing
Factors affecting demand for owner-occupied housing
• Social Attitudes: Owner occupied homes are much
more popular in the UK than in other European
countries such as Germany
• Government Policy: The Government did
encourage the ownership of houses by giving tax
relief on the interest paid on mortgages. This has
subsequently been abolished. In the 1980s the UK
government also significantly deregulated the
financial services industry, making it easier to
borrow money and thus increase the effective
demand for owner-occupied housing
Spot the Difference….!
Factors affecting supply for owner-occupied housing
• Price: If price is rising, this will encourage individuals
to sell their own house and more building will be
encouraged. Also landlords of rented
accommodation may become tempted to sell
their houses. As a result the supply of owneroccupied housing will increase.
• Planning permission: The ability to build houses will
depend on how easy it is to get permission to build
in a particular area.
• Prices of the factors of production: A rise in wages
or in the price of land may make it less viable to
build more houses and sell at a profit.
Application of Demand and Supply Analysis
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Demand: Elastic or Inelastic
Can the market be split further?
Supply: Elastic or Inelastic
Is this different in the Short run or the Long run?
Effective vs Latent Demand?
What’s your prediction? Why?