United Kingdom Housing Market
Compared to other factors, the public sector (government) is the major factor that affects house prices. For a thorough understanding of this assertion, we will classify the public sector into the national and local governments. This classification is essential because each government type profoundly affects the price of houses. To further strengthen the hypothesis, we will also list and describe the other factors that affect house prices. A comparative analysis will provide support to our assertion. We will classify these other factors into: demand factors and supply factors.
Demand factors will consist of consumers and their characteristics such as population growth, productive age, income, psychology, and global competition in trade or services. Supply factors will include the housing stock producers; housing stock suppliers and materials; technology; geographic location; financing for acquisition of houses; and global competition in supply. The diagram in the next page (Figure 1) shows the relationships of these factors that positively or negatively affect UK house prices.
The arrows that point downward represent forward linkages, while those arrows that point upward represent backward linkages. The horizontal arrows with two heads represent economic osmosis, which may or may not achieve equilibrium or market efficiency as changes occur due to the public sector, due to supply factors, and/or due to demand factors. Figure 1. Factors that Determine House Prices in the UK 1. How and to What Extent Could Government Policies Affect House Prices? The public sector affects house price through: (1) foreign policies; (2) monetary policies; (3) taxation; and (4) regulation.
Foreign policies and monetary policies fall within the realm of the national government while property taxation, or its equivalent, usually covers local governments. Meanwhile, regulation applies to both national and local governments. Foreign policies have a major effect on UK house prices. A policy of war with another country can contract or expand the housing supply through several means, and this war policy leads to a drastic imbalance of demand versus supply, which can ultimately lead to an increase or decrease in real house prices.
Meanwhile, a lax immigration policy can open the doors of the United Kingdom from hordes of foreign immigrants eager to settle urban areas that have a scarcity of land space and limited supply of houses. This immigration can lead to a considerable rise in housing demand that can leave behind a slow rate of house constructions. Foreign trade policies can also affect house prices in the long term due to impacts on employment and rates of growth in individual income. Trade policies that are favourable to the UK eventually speed up and expand monetary circulation in local economies.
In a war policy, for instance, bombing from the enemy, which can severely damage houses or flatten these through the ground, can be recognized as a destructive means that contracts the housing supply. War can drastically reduce the number of housing that is available to the population. This is best exemplified when Great Britain and France declared war on Germany on September 3, 1939 (Grew & Taylor, rev. , 1978). The World Book Encyclopedia provides a historical description of Great Britain after World War II as follows: About 4 million British homes were damaged or destroyed during the war.
To relieve crowding in the cities, the British have built a number of completely new towns. From 30,000 to 50,000 persons live in each of these towns, chiefly in two- or three-story apartment buildings. (Beyer 1978) Of course, a major house building program impacts various sectors of the British economy that offer construction dependent products and services (Rogers 1994). Cement, paints, steel, roofing materials, and house finishing are construction dependent products while architectural design, civil engineering, civil works, masonry, including financial services, can be categorized as construction dependent services.
These, in effect, expand and speed up the circulation of money within the economic regions of the United Kingdom where house constructions are being undertaken. As such, these lead to a rise in individual incomes, paving the way for economic recovery along with other measures (Grew & Taylor, rev. , 1978). Moreover, this building program is estimated to have resulted in the building of around 7. 1 million additional housing stock by 1951 (ODPM 2000) to address the depletion of housing due to German bombing raids in World War II.
Consequently, when a rise in income outpaces the building of houses, real house prices are driven up (Cameron, Muellbauer, & Murphy 2006). In a relaxed immigration policy, for instance, the inflow of foreign immigrants in a certain region can exceed the outflow of local immigrants in the same region. This leads to an artificial (non-birth) population growth. Hence, an imbalance occurs in the demand side, which ultimately drives up house prices. Dr. Gavin Cameron (2003), of the University of Oxford, Department of Economics, notes a familiar situation as follows:
…while in the 1980s there was very little net international migration into London, by the late 1990s, net international migration into London was running at about 100 thousand people per year. and …during the 1990s upswing, the net in-migration into London, coupled with a high net birth rate, placed considerable upward pressure on London house prices. Note that in the final quarter of 1988, London house prices for existing dwellings were 61% higher than the UK average. In contrast, in the final quarter of 2002, they were 76% higher.
Monetary policies from national government central banks also considerably affect house prices. Several regulatory powers and fiscal tools of central banks can affect house prices. One such tool, the reserve requirement on banks, which is usually used to control the supply of money when it is increased, can reduce the amount of money that can be lent by banks for housing or businesses. A tight money policy can lead to lesser credit availability and thus, higher interest rates. Meanwhile, a more relaxed monetary policy does the opposite. Cameron, Muellbauer, & Murphy (2006) note that:
…Relative to the 1970s, the estimated effects of [credit conditions index] cci, in terms of its direct, positive effect on real house prices, is roughly canceled out by the effect of the rise in real interest rates…. Interestingly, relatively to 2000, the estimated long-run effect of lower interest rates in 2003 is about 18%… Moreover, changes in monetary policies can also affect the FTSE, the UK stock market (Cecchetti, Genberg, Lipsky, & Wadhani 2000). Upswings and downswings in the FTSE can affect house prices both in the near- and long-terms.
For instance, Cameron, Muellbauer, & Murphy (2006) have found that the rate of growth of the FTSE index has positively affected house prices in Greater London and the South, thus postulating that this may be due to employees of the financial services sector receiving high pay, bonuses, and other gains due to the bull-run in the UK stock market. Of course, this represents effects on house prices in the near term. In the long term, a stock market bull run is positively correlated to a positive employment outlook among employers (Manpower, Inc.
2005). This represents greater hiring and creation—in the case of Tesco, UK’s biggest employer with +250,000 staff; of some 11,000 new jobs in the UK (Manning 2005). This means greater circulation of money and a corresponding increase in disposable income due to the multiplier effect. Hence, rises in income usually lead to increased demand for housing, and thus, resulting to a positive impact on house prices. The same holds true for a foreign trade policy that is favourable to the United Kingdom.
On the contrary, a national government policy that fails to check on the current practice of offshore outsourcing of jobs or offshore plants can negatively affect the British labour market, and thus, result to a recession. A recession dampens consumer spending, which deflates house prices or makes it stagnant. Farlow (2004) describes a recession in the late 1980s and early 1990s when a million people lost their homes in the UK. Taxation is another government instrument that affects house prices. Cameron, Muellbauer, & Murphy (2006 p. 16) will be cited in this paragraph to support this assertion.
In 1988, the Poll Tax has emerged as a replacement to the local property tax in England and Wales. In addition, the year represents a change in the structure of the tax relief as applied to mortgage interests. The tax relief has been restricted to one per property. This change has been announced in March for a planned implementation in August 1st. A surge in house purchases has been noted, especially in London, in the early part of the year. This has been taken to represent consumers beating the August deadline through joint mortgages for financing these purchases.
Finally another determinant to house price changes is regulation. We present Cameron’s (2003 p. 4) analysis as an example. In his analysis, he describes the introduction of Section 106 agreements in the Town and Country Planning Act of 1990 (as amended by the Planning and Compensation Act in 1991). Cameron notes that one sensible purpose of Section 106 is to ameliorate housing development impacts on nearby residents. He recognizes that house building causes negative externalities such as additional strains in the provision of local government services.
However, local authorities often interpreted Section 106 as an “opportunity to improve the quality of the environment, rather than just hold it constant,” Cameron opines. Consequently, Cameron offers evidence of this by quoting Islington (2003), as follows: “…the planning system should operate in the public interest… in a way that adds to the quality of environment. ” Cameron finally concludes that this leads to lesser housing development due to the corresponding high cost of improving the quality of the environment than just maintaining the status quo. Of course, this situation leads to higher house prices.