What extent could government policies affect house prices

What extent could government policies affect class wrongsIn 2009 British hearthstone prices has first to their annual decline since at to the first-class honours degreeest degree 2002. According to the British media, home prices in London rattling faced the worse prices down 5.3%. The London Housing Prices argon perhaps one of the nigh popular issues of discussion in UK. To some extent this is due to the fact accommodate prices stomach nearly trebled since the mid 1990s. Because of this landlords urinate seen huge gains of wealth which has unexp remnanted with a app bently impossible task for those trying for barter foring a family unithold.Since the Wall Street crash in 1929, the economies situation in 2009 was described as the worst financial crisis. The unemployment, realization crunch, failing banks and businesses led the economy into a pro broaded recession. The UK hold market is cyclical and is quite familiar with the flesh outs and busts of the economic cycle . The UK living accommodations market is very fundamental sphere in the economy. The country performance as a whole is closely related with the performance of the housing market. to begin with the crises the situation of the countrys economy was that there was huge sum up of money flowing in the economy, due to attractive supplicate banks were confident to lend the money, however the proceeding of 2009 came about when the banks failed to collect all the money back they lent, therefore they reduced their lending which leads to collapse of large banks in the market. Ultimately the result effected the consumers that without delay it became difficult for them to obtain a mortgage from banks. Now the only way to get hold on a hearthstone left with silver transaction which results in fall in demand for housing. People started to rent a offer rather bargaining. Therefore, a decrease in demand for housing results in house prices were failing.This is perhaps due to the factors t hat determine the prices of houses in a free market. So if we study the last three years of the housing market it exit show us a very resideing picture. provided at this stage we need to take into conside dimensionn those factors which affect the housing prices. Following argon the key factors that play a very central role to determine housing prices in a free market outset http//www.mortgageguideuk.co.uk/house-prices/what-factors-effect-house-prices/Factors That Affect ingleside Prices in UKHouse prices argon affected by a combination of tack on and demand factors.Demand Side FactorsThese are the basic factor which plays an important role in determination of the house prices. If demand is higher than the supply housing prices result increase and if demand for the house is lower than the supply finally prices will decrease. The new housing societys development is very low in UK as compare to demand, which is the fundamental reason for higher housing prices. For house prices to fall, the demand would need to fall extensively.Of course there are m either factors that determine demand for houses.Economic Growth / Real income.High economic growth and lessen unemployment increases disposable income meaning mess place spend more on buying a house. It also increases confidence in buying a house. Moreover, the satisfying rise in Per Capita Income enables people to spend more on buying a house in a free market. By tradition, the mortgage ratio was 3 eras of the salary. For instance, if there is a person who earns 20,000 the building society would led him 60,000. Therefore, rising incomes leads to rise in housing demand which further enables house prices to rise.On the other hand if the economy goes into a recession and unemployment rises, the demand for buying houses would fall significantly.Interest RatesInterest grade affect the hail of paying for a mortgage. Mortgage Interest Rate is the most important factor that affects housing prices. The cost of i nterest payments on mortgage depends on the interest rate set by the brim of England. If interest grade are testd, the cost of mortgage repayments rises this discourages people from buying and it may force people to sell. For instance, in 1992 interest rates were rose over 12% which caused a large fall in demand for housing and house prices fell. provided, in 2009 interest rates have been cut very low (1.5%) but demand is still falling. Though it is cheap to pay a mortgage, but, this is outweighed by the fact mortgage accessibility is low and confidence is low.Availability of Mortgage FinanceStudy shows that in 50s, 60s and 70s, there were strict restrictions about the availability of finance. However, with the increase in deregulation of the banking sector there has been rise in competition in the mo of mortgage products like interest only, self certification mortgages and mortgages up to 6 clock income have enabled people to get more mortgages, which leads to increasing de mand for housing. However, during the credit crunch of 2008, the number of mortgage products on offer fell due to a neediness of finance in the money markets which leads to decrease in demand.Demographics / PopulationThe growing levels of net migration are increasing demand for houses. The immigration from Eastern Europe, like Poland and Romania are enhancing the UK population. Therefore, initiating increase in demand.Moreover, growing number of households are demographic alternates such as number of people living alone. E.g. rising divorce rates have raised number of single people living alone.Future Price Expectations.There is an aspect of hesitant buying in the housing Market. This is mainly the subject in the buy to let market. When people look forward to falling house prices in 2008, it may give confidence to people to sell and cash in their capital gains. If we are not careful falling prices can create a multiplier effect where others are positive to sell. Obviously, most pe ople buy a house to live in, not as an investment. But, diminishing prices will encourage some prospective homeowners to rent rather than buy.SpeculationEveryone doesnt buy a house to live in it. An increasing number of property investors buy houses to try and make both capital gains and income from renting. During the past few decades the number of buy to let investors in the UK has risen. Although UK house prices have change magnitude faster than inflation, renting has also become expensive which is the main substitute to buying a house.Supply side FactorsThis is a second most important factor that affects the housing prices in a free market. A decrease in supply is also responsible to raise housing prices, especially in long term. Some predict UK housing prices will significantly rise in long term due to long-term little(a)age of supply. In the US housing market, they menstruumly have a surplus of supply so a saltation back in the property market is unlikely.In the short run Supply of housing is fixed because it takes time to build houses. Therefore in the short run demand affects prices more than supply.However if the supply of housing is inelastic then an increase in demand will lead to a full-grown increase in price.In the long Run the supply of housing is affected by many factorsMarket ReactionIf people observe house prices increasing and they expect prices to keep on rising, more people will buy a house. Also, when confidence in the market is high, lenders are more unstrained to lend mortgages with small deposits / large income multiples. But now in 2009 confidence is very low, people see house prices falling so dont want to buy and banks dont want to lend mortgages without a big deposit.LocationThe locality causes major variations in UK house prices by geographical area. Even within different areas of London, house prices can vary terrifically.Availability of planning permission. This is difficult to obtain in rural areas.Opportunity cost for bu ilders e.g. are there better returns from other types of investment. brisk houses may be knocked down because they are deemed unfit to live in.An increase in the cost of building new houses will shift supply to the left.In the UK, it is betokend there is a significant shortage of housing is this explains why house prices have risen much faster than inflation and earnings. However, in the US, the supply of housing increased in the period upto 2008 and therefore, the excess supply and falling demand led to a big fall in demand. However, it is important to note that house prices can still fall, even if there is a shortage of supply. In 1992, house prices in London fell over 20%, even though we can say supply is inelastic. A shortage of supply just means they will be on average higher. It doesnt mean they are incompetent of falling.http//www.uk-houseprices.co.uk/housing_market/factors_affecting_prices.htmlWhy House Prices are falling in the UKSince the peak in July 2007, UK house price s have fallen considerably. Following are the main reasons for falling house pricesDifficulty of Getting Mortgage due to credit crunch.Low affordability (high house price to income ratios)Economic recession and rising unemployment.Nobody wants to buy when house prices are falling. government Interventions in Determining the Interest Rate in UKIt is the responsibility of Monetary Policy Committee (MPC) and Bank of England to set Interest rates in UK. The MPC works independently from the Government. Before 1997, interest rates used to be set by the Chancellor. It was argued, with a degree of justification, interest rates were subject to political motivation. The government now just sets the MPC an inflation target of CPI = 2% +/- 1. The MPC aims to keep inflation as close to this target as possible. If inflation is higher up or below this level, the governor of the Bank of England has to write a letter of explanation to the chancellor. In theory, they only target inflation however in exercising they may consider the effects of interest rate changes on economic growth, unemployment, and to a lesser extent the housing market and the exchange rate.http//www.articleclick.com/Article/Factors-that-Affect-Property-Value/2491The Government is in a way trying to prevent house prices falling byBailing out banks and encouraging them to lend e.g. RBS, Northern Rock etc.The MPC is drastically cutting interest rates to make borrowing cheaper. The government is putting pressure on the banks to pass these rate cuts on.Reduction in VAT and increased spending, could limit the extent of the recession.On the other hand, in the current economic crises it is difficult to see any government policy which could successfully prevent house prices fall. This is due to that there is a very strong negative momentum in houses prices, people think that they are overvalued and banks dont want to lend. Hence it doesnt make any difference what so ever government says or tries to do.The only pol icy which really would have stabilized house prices would be better stabilization of the credit boom and bust. If the government had forced banks to save more and share credit in the boom, the boom would have been less and banks would now have more resources to go along lending in the current recession.So, the government cant really stop house prices falling. But, they should find much better policies to prevent a repeat of the boom and bust we have construed twice in the past 17 years.London Housing MarketProblems in the London Housing Market low gear Time Buyers struggling to get on Property LadderThe house prices have been increasing faster than incomes, which is making it more difficult for first time buyers to get on the property ladder. According to the Halifax the first time buyers in London need an average deposit of over 41,000. So it becomes difficult for them to plume the huge initial investment to get hold on a house.Supply Growing slower than demandThe number of new houses and housing societies being built in London is very low. The main reason for this is the limited area of land within the city where new houses can be built. However the demand for various factors is keep on growing, such as net immigration and changing demographic factors.Shortage of Housing for Key Public celestial sphere WorkersThe high rise in house prices to earnings means that there are many public sector workers like nurses, teachers, fireman, policeman and civil servants are struggling to get hold on the property. For instance, comparing the average income of teachers in Greater London, the ration of House Prices has increased 4 times income (2003) to 7 times income (2009).With a shortage of key public sector workers the NHS, for example, has to encourage the migration of foreign nurses to fill the many gaps in its London hospitals.Speculative Buying creating potential for smack and BustThere is a significant rises in house prices has been seen by the London Housing Market, regardless of the monetary falls in the early 1990s, it is seen as a good investment. As a result it has encouraged investors from abroad and UK to buy a house and make huge capital gains. In solvent to this the market has squeezed by increase in demand.Facts about London Housing MarketThere are over three million households in London.The amount of new developments of houses and housing societies in London represents a very tiny proportion of the total stock even less than 0.5 percent.London House Prices fair(a) London property price is 351,028 April 2007The most expensive area is Kensington, Knightsbridge and Chelsea average house price is 918,000.The cheapest area in London is Barking and Dagenham where average house price is 181,802.1990s the market witnessed falling prices with some house owners experiencing negative equity.The supply and demand graph show what has happened, due to declining incomes and consumer confidence and growing unemployment, the demand for hou sing shifted to left from D1 to D2. The Initial price was at P1 but due to surplus supply where demand go beyond supply) there was downward force on prices to decline to P2. Therefore the housing market in this case restricted from area 0P1E1Q TO 0P2E2Q. The supply curve for housing at any moment is actually unchanging. So a decrease in demand decreases prices rather than Quantity.After the utmost recession the UK economy jumps into action with an increase in GDP of 0.1%. The current position of the housing market in the UK is quite astonishing. House prices have been increasing constantly since May 2009 according to nationwide. With the low interest levels of 0.5% by the Bank of England have helped make mortgages more reasonable. Some argue that house prices have risen due to a shortage in supply since home owners are tentative to sell at current prices. The diagram shows a pointed recover in the prices of houses from early 2009, and a constant rise up till now.Source http//www.ban kofengland.co.ukA further explanation for this sharp rise in prices could be due to a lack of supply in the housing market. There is equivocalness in the market which is averting people from putting their estate on the market, this theory of hesitation and reluctance to put the property on the market can be down on a supply and demand diagram below.Source http//www.nationwide.co.uk/hpi/archive.htmS2P3SS1Higher demand with squat supply has lead to the situation in the diagram. Due to low interest rates, affordability of housing has improved, lifting demand from D1 to D2. At the same time reluctant home owners have not put their properties on the ladder, jumper cable to a fall in supply for houses from S1 to S. Overall this creates an upward force on prices from P1 to P3.Q2QPredictionAnticipating amidst such an unsure economic environment can mildly be depicted a challenge. Reviewing at the data of house prices it can be said that in the short-term future prices are probable to incre ase, as they have done in recent times, but in the medium to long-term are possible to fell down. House prices are possible to change with respect to region London is most probably going to see a relative raise in prices as other area may not see such a positive coefficient of growth in prices. It is essential to be rational in ones judgement since interest are beyond doubt going to rise, an signal that mortgage rates will rise thats why demand will decrease in the housing sector, gloomy prices. Pay rates are likely to increase again in the conterminous few years, results in more confidence and belief in buyers so one could argue demand may rise. Assumption will also play an important role housing is generally seen as a good investment, and buying a property during the start of the growth can lead to great rewards, if house prices go on increasing. But it is simple said than done, the economy is on a feeble improvement, increased taxes are likely and the public is expected to cut back their expenditure as people will wish to cut the size of it of their liability load. Interest rates will play a important role, there are many factors that will keep interest rates low the UK budget deficit is increasing to 12% of GDP, this shows a deprived financial position of the government. To get better their position the government will compel uplifted taxes and lower expenditures. But if taxes rise, this depreciation fiscal policy could slow down improvement so interest rates are likely to stay low. given over the overall fragile revival the Central Bank is to be expected to keep interest rates low. Given the increase of VAT back up to 17.5%, expanding oil prices and growing house prices the government may raise the traditionally low interest rates to stop any future inflationary anxiety, but in my judgment interest rates if they will raise in the near future are not likely to increase before the end of 2010.Source http//www.economicshelp.org/ onomics/uk-economy-2010/ http//www.mortgageguidk.co.uk/blog/interestinterest-rate-predions/http//www.statistics.gov.uk/cgget.asp?id=19ConclusionIn general it seems that the UKs housing market has seen the poorer, and is expected to enjoy its boom days in the near future. But it is hard to evaluate the healing as it will depend upon the future interest rate. The size of the interest rate will have its according impact, if we experience a reasonable increase in the interest rate than we can anticipate a good constant recovery while mortgage repayments will not shoot up and people will have time to adjust to the increase, expecting that peoples earnings rise along with the interest rate. A big raise in the interest rate might slow down the Housing market growth, since there will be a rapid variation in the mortgage repayments, this may further discourage the housing market transferring the economy into a double-dip recession. The performance of the economy is a key role in the next few years, and this is extr emely dependent upon government policies. To risen the overall economic growth, government may try an augmentation strategy, but this again will be very arguable as the government is already in a poor financial picture. So the government wishes to play around with its tools it has in hand to flatus the economy back into a secure position, which will then along with it lead to a health UK Housing market.