Good The Main Reasons For Changes In UK's Housing Market Report Example

Type of paper: Report

Topic: Market, England, Homelessness, Housing, Politics, London, Finance, Banking

Pages: 6

Words: 1650

Published: 2021/02/13


Housing market’s effective functioning is important for improving the overall economic situation. During its development, the housing market activated factors contributing to lower inflation, increase the investment and the level of business activity. Regardless of the material and social status, people are trying to make money to improve living conditions and focus on a high level of income and the effective forms of employment and business, creating conditions for providing countries’ financial and economic recovery, gradual recovery from the financial crisis and the foundations for economic growth.
Government regulation of the housing market is necessary as the housing sector has a significant positive impact on the economy because of its high multiplier effect. Forms and role of government’s intervention depends on the degree of economic development and the state of the housing sector. In addition, they change with the development of the housing market and economic situation.
The government’s influence on the housing market involves a combination of market self-regulation with state regulators. State regulators are levers with which the government forms proportions of reproduction in different sectors of the economy. Market regulators include taxes, prices, interest rates, rent payments, wages, pensions and more. In a market economy all market regulators interact together. Deliberately changing their settings, the government can create favorable conditions for the production and sale of various types of housing with a focus on economic development priorities. At certain times of crisis government’s regulatory measures can dominate the market economy stabilizers. In this case the government dictates the conditions of the market, setting rates, sharing zone of financial institutions, altering financial schemes, introducing new market participants etc.


John Cunliffe, deputy head of the Bank of England, said at the International Festival of Business in Liverpool that UK citizens’ heavy indebtedness threatens the country's economy. Cunliffe said that the ratio of citizens’ indebtedness to the level of savings has already reached 135%. Back in 2000, it was 110%, and in the run-up to the financial crisis has increased to 165%.
According to Cunliffe, the main risk lies in the fact that housing prices are rising faster than incomes, respectively, it can lead to an increase in citizens’ debt on loans (Monaghan, 2014).
It should be noted that the proportion of borrowers with loan amount, far exceeding their annual income, is less than 10%. Therefore, by itself, this rule does not affect the market too much. Furthermore, the rule does not apply to small banks. In this case, more stringent criteria for assessing the borrowers’ credit quality will be a slowdown factor in the mortgage industry, which could adversely affect the liquidity and the pace of new housing construction (Spence, 2015).
Such measures indeed have a deterrent effect on the overheated expensive housing market in London, traditionally occupied in recent year’s top-positions in the rankings of the most expensive housing markets, but not fundamentally change the situation.
More significant impact on the housing market may be caused by increase of the refinancing rate by 0.25%. Loans will be more expensive and will be more difficult to serve them for those who need to pay more than a third of income. Therefore, the loans are taken more cautious now, but it doesn’t affect the level of demand in Central London, which can be explained by the limited supply and high demand among foreigners. As a consequence, the increase in demand for rental market and increasing rental rates are possible, as it was in 2009-2010 (White, 2015).
Market experts have repeatedly expressed their concern that the local housing market is overheated. Another indicator is housing prices. In London, the average price has exceeded pre-crisis level of 23% in mid-2014 (Bruce & Schomberg, 2015).
According to the largest mortgage company ‘Nationwide’, in 2013 the average cost of housing in London rose by more than a quarter, up to £ 400,404 - and this is the largest increase since 1987. Because of too rapid growth in London’s house prices, experts say that they fear "bubbles". One of the largest British real estate companies, ‘Grosvenor Estates’ sold a premium-class property for £ 240 million, not knowing what to expect from the market.
Despite the fact that banks have tightened mortgage terms, low interest rates and falling unemployment are the basis of demand. The European Commission announced that it is expected from the UK to expand measures to stimulate housing construction. Despite the fact that the construction of new houses has begun, it is carried out with low intensity and does not meet the demand (Hamilton, 2015).
Rise in house prices in London is provoked by foreign investors; foreign buyers create problems on the market. Pushing up housing prices, they make it impossible to buy houses for the local citizens – so the British are forced to take out loans that do not always correspond to the level of their income.
The first places among buyers in London are the Chinese and the Arabs. The main buyers of expensive real estate in London have become rich men from India. According to experts, in contrast to the Russians and Ukrainians, they acquire property exclusively from the investment point of view – they buy up the whole floor, and after some time resell it.
High return on investment in real estate is one of the factors that attract foreigners to the housing market in London. Other factors that trigger the growth of foreign investments in the real estate sector include the following:
Economic stability in the market. The low level of inflation (less than 2% per year) and the complete absence of the devaluation of British pound provide high purchasing power of the investment;

Loyalty of legal and regulatory framework;

Stable political situation;
Leading educational system, progressive cultural environment, and high social protection.
Stable economic, political, legislative situation in the UK generates intense rising of prices in the market. Only on London’s market the average cost of real estate increased to £ 508,000. In elite areas such as Knightsbridge, South Kensington, Belgravia, the increase in real estate prices crossed the 20% threshold.
Trends in London’s real estate market, as well as in the UK as a whole, make it attractive for long-term investment. London has the best combination of market’s quality characteristics: high demand, low competition in the market, loyal legislative framework, and well-developed economic, social and political environment. These characteristics give the guarantee for a further rise in real estate prices - in general the whole London’s housing market will increase in price by 35.8% in 2018.
If we consider the shortage of housing in London and the country in general, the size of the housing shortage in British capital surpasses the lack of real estate property in UK. For example, at one housing facility in London in 2014 accounted an average about 9.7 investors, and in 2012 this number reached a total of 8 customers. According to Savills’ statements, London requires the construction of over 50,000 houses. In this case, the primary housing in London should not exceed a value of £ 12,500 per square meter. It is assumed that the shortage of supply in UK’s capital cannot be cut off until 2020, according to ‘Knight Frank’, because by that time it will be needed to build more than 800,000 new objects (Inman, 2015).
Deficit of housing in the UK as a whole is much less, because it is dictated by demand for housing, which is 4-5 times lower than for the apartments and houses in London. Despite this the government involves the construction of new houses, which would be sold at more affordable prices than it’s currently possible (in 2014 the average cost of housing in the inter-urban reaches £ 180,264).
UK’s influx of large amounts of foreign capital, which was mostly invested in the real estate market, has led to a boom in housing prices. The situation in the UK’s housing market shows that market forces alone cannot ensure sustainable development of affordable housing market. Government regulation is necessary for the development of affordable housing market in the long term. Government’s regulatory actions give a positive effect when they are implemented comprehensively, both through regulation and state involvement in the mortgage mechanism, and directly supporting the citizens who need housing. The housing market is very spacious, and even in the case when UK government cannot fully assume the risks of mortgage lending and ensure its further development.

The effectiveness and feasibility of using monetary policy to affect the real estate market depends on the following factors:

- Expectations of buyers and sellers in the market;
- Inflation in the economy;
- The degree of penetration of foreign capital into the financial system;
- The presence of Central bank’s sufficient information for making decision.
Contractionary monetary policy leads to lower prices, as higher interest rates lead to an increase in the cost of financing real estate development projects and accordingly reduce the demand for housing. Due to fluctuations in inflation, central banks tend to raise interest rates, which reduce the demand for real estate and its price.
In the UK the use of monetary instruments and their relationship with the financial system are based on historical experience. Classical monetary instruments have some impact on real estate markets are refinancing rate, rate on loans and deposits. Using interest rates, central regulators are trying to stimulate or deter active economic agents for the purpose of price stabilization, but in crisis this instruments seems like not enough, so regulators have to use a number of additional tools like programs etc.


Angela Monaghan ‘UK home construction industry upbeat amid property boom’, The Guardian, May 2, 2014.
Anna White ‘House prices have hit the bottom and the only way is up’, The Telegraph, April 9, 2015.
Phillip Inman ‘UK construction growth slows down but housebuilders remain upbeat’, The Guardian, January 5, 2015.
Peter Spence ‘Mortgage approvals hit six-month high as house prices 'set to rally'’, The Telegraph, March 30, 2015.
Scott Hamilton ‘U.K. House Prices Rise 0.4% as Halifax Predicts Slowdown in 2015’, The Bloomberg, April 9, 2015.
Andy Bruce & William Schomberg ‘British house prices pick up more than expected in February - RICS’, Reuters, March 12, 2015.

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