Sunday, July 6, 2008

UK Housing Market Price Crash Explained (Unit 3)

'Houses running & jumping off the cliff' shows that the prices of house in UK has declined in a rapid manner

Reasons for UK housing market price crash:

1. Nature of houses having inelastic demand & supply. Price elasticity of demand for houses is low due to its nature as necessities (PED <1), while price elasticity of supply for houses is low (PES<1) due to the considerably long time period taken to complete any single housing projects. As such when there is a fall in demand like now, prices of house will suffer a huge fall

2. People adopting the ‘wait & see’ attitude. Many home buyers, existing or first-timers are anticipating that the prices of house are set to fall further. In the meantime, demand & thus prices will continue to rock bottom before they pick up again in the future

3. Difficulty to obtain loan. The subprime mortgage crisis has been a nightmare to bankers. Billions of losses had been uncovered. High number of defaulters has caused them to be more prudent in lending out the money e.g. tightening the screening criteria & eligibility to acquire loan

4. Rising mortgage cost. Even if there were loans available, they are now made more costly for borrowers to incorporate unforeseen credit risk especially fixed rate mortgages. As such there is lower willingness for people to buy houses

5. Falling consumer confidence towards UK economy. Traditionally most Britons store their wealth in property market. As such, when there is a fall in housing prices, their wealth are severely affected. This makes them more reluctant to acquire more houses. Second, rising energy prices & food prices mean lesser disposable income for a working individual. Third, fear over job security. Recently BBC reported that number of unemployment had rose by 38, 000 to 1.64 million (BBC news, 11th June 2008). What’s more, when financing a house is a long term commitment


1. This means increased in affordability. First-time buyers are normally being priced out as prices of house increase at a rate faster than inflation & their income. Now, with more mortgages becoming affordable, inequality in property ownership between the younger & older generation will be narrowed. But one can always argue that this claim is only true if the fall in prices is significant

2. Greater mobility of labour. High prices of house almost everywhere in UK have contributed to geographical immobilities & difficulties to attract sufficient quantities of labour e.g. teachers & nurses in some parts of UK. This is because in some areas, prices of house are so expensive & yet these workers earn only a decent wages. Now with cheaper accommodation, perhaps the shortages of labour in some areas could be eliminated

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