Analysis of UK Housing Market and Mortgage Policies

The provided assignment is a comprehensive analysis of the UK housing market and mortgage policies. It draws from a range of sources, including academic papers, news articles, and government statistics. The report examines the impact of mortgage policies on homeowners and explores the effects of interest rate changes on the property market. It also references case studies, such as Waitrose's approach to managing supply chains and John Lewis's competitive advantage in a tough retail market. The report provides insights into credit supply constraints and their influence on house prices in England. Overall, it offers a detailed analysis of the UK housing market and mortgage policies.

Running Head: FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
Financial and Economic Literacy for Managers
Name of the Student
Name of the University
Author note

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FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
Table of Contents
Answer to question 1..................................................................................................................2
Waitrose.................................................................................................................................2
Market structure of supermarket chain in UK........................................................................2
Growth and Marketing strategy of Waitrose..........................................................................3
Answer to question 2..................................................................................................................5
Factor affecting demand of housing.......................................................................................5
Interest rate.............................................................................................................................6
Factors affecting supply of housing.......................................................................................8
Bank of England’s action in the housing market...................................................................9
Answer to question 3................................................................................................................10
Output Performance.............................................................................................................10
Labor market performance...................................................................................................13
Movement of Price level......................................................................................................14
Answer to question 4:...............................................................................................................15
Answer to question 5:...............................................................................................................17
Answer to A:........................................................................................................................17
Answer to B:........................................................................................................................19
Answer to C:........................................................................................................................19
Reference List:.........................................................................................................................21

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FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
Answer to question 1
Small and Medium sized enterprises provide a great support to UK economy. The
expansion strategies of SMEs open up new market and create new job opportunities. In order
to grow bigger these companies invest in innovation leading to intense competition in the
marketplace. As per 2014 statistics, UK has nearly 5.2 million SMEs. In UK, a wide majority
of business is currently employing less than 10 people, accounted for 33 percent employment
and enjoys a turnover of 19 percent (uk.wsj.com 2018). However, the small and medium
enterprises has accounted a disproportionate growth rate. It is found that 6% of total SMEs in
UK experience higher growth rate and responsible for generating fifty percent of new jobs
between 2002 and 2008 (fsb.org.uk, 2018). The grocery supermarket chain in UK is one of
the interesting aspect to be discussed. The supermarket chains some large and small retailers.
Waitrose
Waitrose belongs to the chain of British supermarket structure, forming the division
of food retailers in Britain. It has nearly 352 branches in United Kingdom. Among these
branches 30 are convenience shops. Currently Waitrose occupies a market share of 5.1
percent in grocery supermarket chain.
Market structure of supermarket chain in UK
The supermarket structure in UK resembles the feature of an oligopoly market. An
oligopoly market is characterized by the dominance of few large firms in the market (Sloman
and Jones 2017). The grocery supermarket in UK is now increasingly dominated by few large
sized firm such as Tesco, Sainsbury and ASDA. The concentration has been accelerated
largely until 2012. Thereafter, two low cost retailers Aldi and Lidle have successfully
expanded their business. this has reduced the four firm concentration ratio from 75% in 2011
to 72.3% in 2016 (ibisworld.co.uk, 2018).

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FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
Figure 1: Grocery market share in UK
(Source: bbc.co.uk 2018)
Growth and Marketing strategy of Waitrose
In order to survive in a concentrated market Waitrose has undertaken a number of
strategies. The strategies are discussed below
Advertising
Advertising is one of the key marketing strategies for oligopoly players. Advertise
provides information to the customers about the unique feature of a product. It is a low cost,
time and energy saving way for customer to get knowledge about a product. Advertising
helps to reduce concentration or monopoly power by offering information regarding new and
competing goods. Waitrose has successfully increased its market share and stimulate sales
growth by focusing on advertising and creativity designing. The retail advertising of Waitrose
has two objectives – providing price message tactically and offering a strategic quality
message (dandad.org 2018). Waitrose has released a series of advertising on different
platform like national television, internet and others. As a part of brand promotion the
company has sponsored England Cricket team from 2013 to 2016.
Product differentiation

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FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
Product differentiation is another important strategy devised by business to increase
its market share. The objective of product differentiation is to make own product different
from its rival as much as possible. A differentiated product attracts more attention of the
customers and thus helps to achieve sales growth. Waitrose has a differentiation strategy
covering both the price and quality aspects. Waitrose differentiation strategy focuses on
upper market segments and offers a wide range of fresh products with good quality services
(accaglobal.com, 2018). Unlike taking a diversification strategy of four big retailers,
operation of the company is mainly concentrated on the market of food and drinks. Waitrose
make its stores the most convenient place for customer to have desired product at the
cheapest price. The Waitrose customers have low stress regarding quality of product and
often willing to pay premium price.
Marketing Mix of Waitrose
The term marketing mix refers to the business strategy where business uses a
combination of different tactics to achieve the marketing objective for different targeted
customer group (businessinsider.com 2018). Different factors encourage the company to vary
product mix. Waitrose use promotional offer pricing varied from stores to store.
The different marketing strategy of Waitrose provide the company an important
position in the grocery supermarket chain and opens up future scope for business expansion.
Answer to question 2
By definition, housing market indicates a market that deals with demand and supply
of housing in a specific nation or region. The housing market of UK has experienced some

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FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
dramatic changes since 1990s. The ownership trend in the housing market of UK gradually
shifted from private ownership to a continuous rise of public housing offered by local
authorities. There are different factor affecting demand and supply of housing and hence,
play an important role in determining housing price.
Factor affecting demand of housing
Affordability:
Affordability is a principle determinant of housing demand. When people’s income
rises that people are able to spend more on property. During economic growth people’s
income increases leading to an increase in housing demand.
Figure 2: Housing affordability index in UK
(Source: Wilcox and Perry 2014)
The above graph depicts that housing price and demand can rise at much faster rate
than income. This suggests that apart from earning there are other factors that significantly
influences housing demand.
Interest rate
Interest rate refers to the cost of mortgage repayment and hence plays an important
role in determining housing demand. Most of the homeowners in UK has a preference toward

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FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
variable rate of mortgage. Consequently, when Bank of England changes base rate then it
affects mortgage payment as well.
Figure 3: UK inflation and base rates
(Source: Hilber and Vermeulen 2016)
When interest rate in 1992 reached to 15% then housing demand collapsed.
Conversely, the low rate of interest between 1990s and 2000s encouraged people to buy more
house. However, exception has seen in 2008-2009 (Hilber and Vermeulen 2016). During this
time, despite a low interest of 0.5% housing demand remained low because of persistent
recession and increasing unemployment.
Population
A growing number of population raises the housing demand. Apart from aggregate
population, housing demand is subject to average size of household.

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FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
Figure 4: Population projection of UK
(Source: Hilber and Vermeulen 2016)
Other factors affecting housing demand include confidence of the consumers,
availability of mortgage and renting cost.
Factors affecting supply of housing
The supply of housing depend on the tendency of building new houses in the
economy. Availability of land determines housing supply. In UK, a big issue in housing
supply is the restriction in housing planning and limitation imposed on building houses on the
green-belt land. Builders also considers the profitability of building houses.
In UK, housing demand increases at a faster rate than demand leading to housing
shortage.

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FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
Figure 5: Demand and supply projection of housing
(Source: Favara and Imbs 2015)
The continuous supply shortage results in a rising house price in the long-run.
Figure 6: Real house Price in UK
(Source: Favara and Imbs 2015)
Bank of England’s action in the housing market
The Bank of England intervene in the housing market through regulating banks and
interest rate. In 2015, Government in UK introduced two new instruments through which
BOI can limit mortgage. The first is restricting the proportion of people who can borrow the

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FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
money relative to their housing valuation. This is done to reduce loss of the banks. When
house price declines and borrowers fail to repay loans then bank loss money in situation
where housing valued less than loan (McCrone and Stephens 2017). The second restriction is
placed in form of limiting borrowing in relation to income. People taking large amount of
loans tend to cut their spending in times of rising interest rate.
In response to rising housing price, the Bank of England has taken action to restrict
the mortgage borrowing. A cap is imposed on the loan taken compared to the income of the
borrowers (homesandproperty.co.uk 2017). The cap is designed in such a way that it would
not restrict lending ability of banks if housing price grow as per expectation. However, if
price goes beyond expectation then the policy will be effective to curb it by restricting credit
boom.
Figure 7: new mortgage by loan to income multiple
(Source: ft.com 2018)
To curb housing demand and control housing prices the Bank of England has
attempted to increases the interest rate to 0.50 percent from the historic low levels of 0.25
percent (ft.com 2018).

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FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
Answer to question 3
The macroeconomics performance of a nation depends on a number of indicators.
These indicators are related to output market, labor market, price level and other related
measures.
Output Performance
Aggregate production or GDP is the most important indicator of economic
performances. Gross domestic product in general measures the market value of all the
produced goods and services in a nation. The goods can be values in either current year’s
price or taking prices from a chosen base year. The former is called nominal GDP while later
is known as real GDP. The percentage change in the real GDP between two consecutive years
reflects growth in GDP (Sloman and Jones 2017). The overtime trend in real GDP growth
indicates the trend in economic growth. The per capita income obtained by dividing GDP by
population gives an average income measures and help to identify the standard of living in
the nation.
Figure 8: Gross Domestic Product in UK
(Source: ons.gov.uk 2018)

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FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
In 2016, the Gross Domestic Product of UK was valued 2647.90 billion US dollar.
The GDP in UK represents 4.27% of average world’s average income. The average GDP
between 1960 and 2016 is stood at 1137.23 billion. In the last ten years, the highest GDP was
recorded in 2014 with GDP valued at 3022.83 billion USD. After than growth slows down.
Figure 9: GDP growth rate in UK
(Source: ons.gov.uk 2018)
The GDP growth rate UK has considerably slowed down in recent years. In the first
quarter, the sluggish growth rate was contributed by a lower confidence of consumers. The
income of average consumer has come under significant pressure following a slow growth of
employment and wages. The rising inflationary pressure further hurts consumption demand.
The growth rate of 0.3% is the slowest in a year (theguardian.com 2017). Along with a slow
GDP growth, per capita GDP in UK has also declined. Per capita GDP has risen only by
0.1% as compared to 0.5% growth rate in the last quarter.
Labor market performance

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FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
The performance of labor market is reflected from the prevailing unemployment rate
in the economy. Unemployment refers to a situation when some members in the labor force
fail to find jobs suitable for them at the existing wage. Other indicators of labor market
performances include participation rate of the labor force, growth of wages, full time and part
time employment and such others.
Figure 10: Trend in unemployment rate
(Source: ons.gov.uk 2018)
The unemployment rate in UK has recently increased to 4.4 percent from in the last
quarter of 2017. Prior to that unemployment rate was settled at 4.3 percent in the third quarter
of 2017. There is 1.47 million people unemployed in UK. In the economy there are nearly
8.77 million people aged from 16 to 64 years. The unemployment rate though slightly
increased in last quarter of 2017 but unemployment rate has declined for a prolonged period
of 2008-2014. During this time, there was a persistent fall in real wage rate. The nominal
wage growth rate in 2014 was only 0.7%. The labor market has become highly flexible with
enforcement of Zero hour contracts. The economy faces both cyclical and structural
unemployment.
Movement of Price level

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FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
The trend in price level is captured by the prevailing inflation rate in the economy.
Inflation indicates a situation when there is gradual rise in the general price level.
Figure 11: Trend inflation rate in UK
(Source: ons.gov.uk 2018)
The graph above shows the core inflation rate in UK. The core inflation rate excludes
prices of food, alcohol and tobacco and food price while computing the inflation rate. The
core inflation rate has increased from 2.5 percent in the third quarter of 2017 to 2.7 percent in
the fourth quarter. The import in UK have become costlier because of weakness of sterling.
This has made imported food and fuel expensive (theguardian.com 2017). This factor in
combination with higher prices of crude oil lifted the price level up.
Answer to question 4:
Financial leverage is regarded as the extent to which securities having fixed income
and preferred stock are put into use in organization capital structure. The managers use the
financial leverage when the assets that are purchased by them are inside the debt capital to
generate earnings greater than the cost of debt which is used to finance them (Atrill and
Mclaney 2017). The managers make the use financial leverage to increase to increase the
organization’s profit. Since the capital structure is regarded as the important component of an

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FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
organization. The primary objective of leverage by managers is to undertake the decision on
the amount of capital needed to functions its business.
Once the amount is ascertained, the managers uses the financial leverage to examine
the financial markets in order to ascertain the terms through which the firm can raise the
capital. This step is considered crucial in decision making by management since the market
environment might curtail the capability of the firm to issue the debt securities and common
stock at the attractive level. As a result of this, once this query is resolved, the managers of
the company can design the correct capital structure policy and construct the package of
financial instrument which is required to be sold by the investors (Besley, and Brigham
2013). By following the systematic procedure manager’s financial decision is implemented in
respect to the long run strategic plan and the way through which they want to expand the
company.
For example, ABC has generated the capital structure comprising of 100% equity
capital. Consequently, the ROE is anticipated to fall amid the range of 15.6% and 23.4%
based on the level of organization before tax earnings. Similarly, when the organization ABC
capital structure is re-engineered comprising of 50% debt capital and 50% of equity capital,
the organization ROE increases significantly to wide range falling amid 27.3 and 42.9%.
Managers of small and big business owners makes the use of the current account in
decision making when they are faced with the daily business (Atrill, McLaney and Harvey
2014). Managers makes the use of the current account information for their daily operations
to generate reports that offer them with inside into the business performance namely the
determination of the profit margin and utilization of the labour. Relatively the objective of
implementing the current accounting decision is to enable the managers to gain an insight
into the data driven input such as making every day decisions (Besley, and Brigham 2013).

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FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
Both the managers of small and big business can leverage the powerful trove of
computations in order to improve the decision making over the period of time for gaining
higher amount of profit and gaining greater amount of competitive advantage (Atrill,
McLaney and Harvey 2014). The managers to ascertain what should be sold use current
accounting information. For example, the manager of the business might be not sure where
they must focus their efforts. To further assess this decision, the accounting manager may
examine the cost that create a difference between each product and common associated to the
product.
The current account information that offer the management with the data driven look
on the methods of growing the small business. Financial statements and projections are some
of the examples of how the managers of accounting information makes the use of the
information to assist management for the future growth (Warren and Jones 2018). By placing
the focus on the such current account information the managers can undertake the decision of
aiming for the constant improvement and are justifiable based on the intelligent analysis of
the organization data.
Answer to question 5:
Answer to A:
Tesco Plc
2016 2015
Liquidity Ratios Current Ratios
Current Assets 14,828 11,958
Current Liabilities 19,714 19,810
0.75 0.60
Market Value Ratios Earnings Per Share 2016 2015
0.05 -2.12
Asset Management Ratio Fixed Asset Turnover 2016 2015
Net Sales 54,433 56,925

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FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
Fixed Assets 33025 36791
Less: Accumulated Depreciation 15125 16351
Total Fixed Assets 17900 20440
3.04 2.78
Debt Management Ratio Debt Ratio 2016 2015
Total Liabilities 35,278 37,143
Total Assets 43,904 44,214
0.80 0.84
2016 2015
Profitability Ratio Net Profit Margin
Net Profit 138 -5,741
Total Revenue 54,433 56,925
0.25 -10.09
Sainsbury PLC
2016 2015
Liquidity Ratios Current Ratios
Current Assets 4,444 4,505
Current Liabilities 6,724 6,923
0.66 0.65
Market Value Ratios Earnings Per Share 2016 2015
23.9 -8.7
Asset Management Ratio Fixed Asset Turnover 2016 2015
Net Sales 23,506 23,775
Fixed Assets 15259 14854
Less: Accumulated Depreciation 5495 5206
Total Fixed Assets 9764 9648
2.41 2.46
Debt Management Ratio Debt Ratio 2016 2015
Total Liabilities 10,608 10,998
Total Assets 16,973 16,537
0.62 0.67
2016 2015
Profitability Ratio Net Profit Margin
Net Profit 471 -166
Total Revenue 23,506 23,775

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FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
2.00 -0.70
The current ratio of Tesco for the year 2016 stood 0.75 whereas Sainsbury reported
the current ratio of 0.66. This represents that Tesco is better placed in terms of liquidity to
meet its short term financial obligations. The market value ratio comprises of earning per
share which represents that in 2015 Tesco reported negative EPS of -2.12 while in 2016 it
positively reported EPS of 0.05. Sainsbury on the other hand reported EPS of -8.7 in 2015
while in 2016 it significantly improved to 23.9.
The fixed asset turnover ratio for Tesco stood 2.78 in 2015 while in 2016 it stood
3.04. Meanwhile Sainsbury in 2015 reported fixed asset turnover of 2.46 which eventually
declined in 2016 to 2.41. Tesco is making greater sales revenue from its assets than the
Sainsbury. The debt and net profit ratio for Tesco stood 0.80 and 0.25 in 2016 whereas
Sainsbury reported 0.62 and 2.00. The overall performance of Sainsbury is better than Tesco
since the company has reported better proportion of debt ratio and strong net profit in 2016.
Answer to B:
Computation of Present Value
Interest Rate 4.50%
Year Start Principal Start Balance Interest End Balance End principal
1 £ - £ - £ - £ 650.00 £ 650.00
2 £ 650.00 £ 650.00
£
29.25 £ 1,329.00 £ 1,300.00
3 £ 1,300.00 £ 1,329.00
£
59.82 £ 2,039.07 £ 1,950.00
Answer to C:
Initial Investment Amount -50,000
Total Number of Years 5 NPV
Project A Years Project B
Number of Years Annual Cash Flow 0

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FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
Year 0 -50,000 -£ 50,000.00
Year 1 £ 26,000.00 1 £ -
Year 2 £ 17,625.00 2 £ -
Year 3 £ 15,000.00 3 £ -
Year 4 £ 10,000.00 4 £ -
Year 5 £ 32,000.00 5 £ 99,500.00
Npv £ 23,811.83 £ 8,387.92
As evident from the above stated computation an assertion can be bought forward by
stating that the NPV of project A is better than the NPV of the project B. Therefore, it would
be wise to select project A over project B.

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FINANCIAL AND ECONOMIC LITERACY FOR MANAGERS
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