Impact of Brexit on UK Housing Market

This assignment explores the potential consequences of Brexit on the UK's housing market. It examines the current state of the market, including a price bubble, and considers how it might be handled to avoid a worse outcome. The study also looks at the impact of house prices on consumption in the UK and discusses the role of the financial sector in this process.

Trading Economics

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
Analysis of London Housing Market.....................................................................................1
Evaluation of economic functioning of the housing market..................................................4
Policy intervention to correct market failure and recommendation to policy makers...........8

INTRODUCTION
The economic indicators of a country include actual values, historical data charts, future
forecasts and predictions, economic calendar and business news of nation. The trends of an
economy include various factors such as GDP, currency market, the employment and
unemployment rates, business, consumers and housings trends and changes in the respective
markets. In the present report, the trends in the housing market of London are carried out through
the use and establishment of microeconomics knowledge, tools and techniques. The trend in
housing market are analysed is detailed by evaluation of demand and supply and elasticities in
market. Along with the present analysis and future forecast of trends in housing market in
London.
MAIN BODY
Analysis of London Housing Market
The housing market of London includes all types of properties such as detached houses,
semi detached houses, terraced houses, flats and maisonettes. All these properties are used for
living by the human beings (Storey, 2017). Importance of housing market for economy of
London is given as below:Houses represent the single biggest purchase of household and a house
is a single largest item of wealth of a consumer.
 Changes in prices of houses have a significant impact on economy of nation. In a report
presented by UBS a Swiss investment bank, London was ranked to be at the second
position for most overvalued property market in the world. The report suggested that in
whole world, London has the most overvalued property.
The average price of all the properties in London:
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From the above graph it can be clearly seen that their was a continuous rise in the prices
of the housing property in London from 2006 to 2016. This rise have it difficult for the bachelors
in to buy a house or a property in London, which is not a good indicator for economy of the
nations. The average price for all types of housing property was £264494 in Dec 2006, and by
the end for year 2010, the rate increased to £285353 in Dec 2010. in the mid 2012 the prices
crosses the 300000 mark and reached to £304081 in May 2012. form here the price raised up
with a faster pace (Barr, and et.al., 2015). In august 2104 the prices hit to £404754 and by the
end of this year the price falls down to £402847. with the end of year 2015 the price of hosing
property in London was £450053 and towards the end of year 2016 the rates were £472374.
With this it can be concluded that the prices for the housing property in London have seen a
major increment from the year 2012. in a period of mere 4 years from 2012 to 2016 the rates
have increased by approximately. £172000.
Yearly Percentage change in the property prices:
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Illustration 1: Average price of all properties
(Source:Housing price, 2018)

The above graph indicates year wise percentage changes in increment in prices started in
year 2006 with a rate of 10.96% in Dec 2006, but in the very next year there was a down fall in
price increment of housing property (Fethi and Katircioglu, 2015) . For year 2008 and 2009
there was no major increment, rates had fallen down to 1.45% in May 2008 and by end of this it
has reached to -10.57%. In January 2009 it was -15.24% and in the year end it again became
positive with a rate 6.4%. With beginning of 2010 prices started to rise. Up to 2014 there was
mix trend in price increment sometimes with a growth and sometimes though a decrement in
rate. In Dec 2014 increment rate was 14.45% and by end of 2015 it again reached to 11.70%.
With end of year 2016 percentage increment in rate fallen down to 4.96%.
This can be clearly stated though there was an increment in prices of the housing property
in London but incremental rate was varying during whole time and the growth was not with
same pace.
Evaluation of economic functioning of the housing market
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Illustration 2: yearly percentage rise in price
(Sources: housing finance, 2018)

Demand and supply: The demand and supply of a housing property are interrelated. It is
important to maintain an equilibrium between demand and supply. If demand is more than the
supply is less, this will create a situation of excess demand and if demand is less and supply is
more a situation of more supply will arise, both the situation create a disequilibrium in the
economy.
Demand and Supply of housing property in London:
From the period from 1991 to 2007, there was a high demand for housing property in
London as compared to supply of same. With this, the government forecasted a projected
growth of household to 27.5 million by 2033 as increment of 232000 households every year from
2008. For this, government started to support financing of housing property through mortgage
loans (Gibbs and O’Neill, 2015). With an announcement of mortgage loans which was given as
a governmental support, and It allowed people to obtain a 20 % interest free loan from the
government to buy housing property. With this target was set by government to increase supply
of housing to 240000 per year.
With a slum in the credit crush in year 2008 this target of London government of the
housing construction fallen behind. With an economic crisis the rate of completion of housing
property the construction of which has been started began to fall down. There was a fall back in
completion of 100000 houses in a year with the occurrence of the economic crisis.
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Illustration 3: Price equilibrium

Trends in starts and completion of housing property
Reasons for the rise in the prices of housing property in London:
Overseas investment: According to the labour Mayor Sadiq Khan, there was a huge
investment in the housing property by foreign investors-as first time buyers in London, which
was held as an investment by them and gave them offshore tax haven. Out of 28000 newly build
houses, 3600 was purchased by the foreign investors from Hong Kong and Singapore from 2014
to 2016. The price for this investment ranged in between 200000 to 500000 for first time buyers.
Mortgage loans: The government started provide housing finance to citizens of London
so that target of more housing construction can be achieved (Beswick and et.al., 2016) . But
with an economic crisis in year 2008 the financial institution for the housing construction were
not left with the liquidity and the loaner were unable to repay the loan amount. With this the
housing industry also got crashed and the rates of properties started to rise with a faster pace and
still there is no stoppage in the rate increment. also got crashed and the rates of properties
registered to rise with a faster pace and still there is no stoppage in the rate increment.
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Illustration 4: Trends in starts and completion of housing property

Credit crunch: with a crash in the economy the targets set to boost up housing
constructions were under serious pressure. With this crunch the mortgage advances were also
reduced by government which mean that private builders will reduce the supply of new housing.
With no loan private builders will not build houses they can not sell (Muellbauer, 2018) . There
is a need to increase the supply of new housing to reduces the prices but it is still unclear that
when the market will recover to meet the need of the demand of new housings.
Implications of housing shortage:
 In long term the prices will rise
 The price of houses will be higher than the percentage of income
 More emphasis on private rental accommodation will be given
 Rise in wealth inequality
 Rental price will face an upward pressure
Incentives: to meet the gap between demand and supply of the housing property in
London. The labour mayor Sadiq khan is has announced a development of new guidelines for
building developers with low costing housing policies. For this a plan for development of vast
Old Oak park Royal sites in west London was boosted up to 242 from 200 which amounted to
40% of 605.
Elasticity of demand and supply: Elasticity of demand and supply means that a shift in
the price of the asset does not have a drastic impact on the demand or supply of the asset it is not
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Illustration 5: mortgage payment

something people are willing to go with. At present the housing market of London have lost the
elasticity as there is a readily available supple of new housing but there is a crash in demand due
to inflation in the prices of housing property (Leishman, 2015). The people of London are not
ready to buy new houses because there a high rise in the prices of housing property as people are
not able to afford the rent at present as well. With the end of 2106 the prices were, there was no
demand and housing market was away from the equilibrium and demand and supply were
inelastic.
Price bubble: price bubble is an economic cycle in which the price of an asset increased
with a rapid pace and then diminishes. In this, when there is boom of the product people will
purchase the asst at high prices in the hope that they can sell it even at higher rates. with a
recession and lost in the confidence the price of the assets is boomed down and there emerges a
situation of market crash (Burrows, 2018). In a price bubble the resources are transferred to rapid
growth areas and at the end of the bubble the resources are again moved to deflate the price. The
housing market of London has become dysfunctional as rate of home ownership is reducing and
people are now more focusing on rental accommodation. The average age of housing ownership
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Illustration 6: Affrodibility index

is rising as young people are not able to afford the new house with a higher prices. The
homelessness is gearing up in London.
This can be stated that the housing market of London have entered the price bubble. The
period of price bubble of the housing market started with the credit crunch in the nation and with
government providing mortgage loan to increase the housing property in London. With this the
builder focused on more and more development of new housings and with the credit crunch the
people were not left with the money to buy the new housing developed by the builders (Grabs,
2015). The housing market of London have entered in the price bubble and the rates are still
inflating at a faster pace. This bubble will end with introduction of certain policies and resource
diversification by the London government.
Stages of a price Bubble:
1. Displacement: this is the stage where people in London were given loans on less
interest rates to attract the builders and development of housing market of London.
2. Boom: this is a stage more and more people were involved in new housing construction
ans every one was entering the housing market.
3. Euphoria; this is a stage where all the logics and cautions are thrown out of the window
and all started to invest without ant pre thinking and planning.
4. Profit taking: the people who ascertain the risk of bursting of the bubble would have
sold the property a profit to avoid the risk of loss of money.
5. Panic: the prices of the housing will drop down as quickly as they rose. The people at
this stage will try to sell out the property at any price. This will lead to a rapid decline in
the prices of the property.
At present London housing market is between profit taking and panic stage. The prices
are still very high so profit making is a bit difficult and there are no policies' introduction to
reduce the prices of housing.
Policy intervention to correct market failure and recommendation to policy makers
Policy intervention: the housing market of London have enters in a bubble with a boom
and now it is expected that it will end in a bust with crash of housing market. With certain
measures he nation van pop up the bubble without ant major crash in the market. With a proper
planning and execution this high price rise and no demand situation can be converted into a
positive demand with lowering the prices.
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Reverse mechanism: a reverse mechanism can be applied with a fall in the demand with
relative to supply will lead the market to reach a new equilibrium with lower price. More people
will be afford houses at a lower rates. The policies to lower the prices shall be made so that a
price equilibrium can be achieved in order to protect the market from marker crash.
Proportionate changes in the prices: there is a need to increase the demand of the
housing property among her people. This can be done by a proportionate change in the price of
rents and housing property (Housing prices, 2018). For this the tax rates on the housing property
can be revised and the capital gain on the sale of the houses can also be exempted, this will lead
to increased in the demand of the housing property.
Increase in demand: measure to reduce the prices shall be taken through increasing the
income base of the individuals of London. The first time buyer shall be given certain incentives
and subsidies so that a demand can be increased. With an increase in the demand the market will
attain a price equilibrium as readily supply is available.
Lower interest rates and Affordable rents: the interest rates shall be made lower in
comparison to the rents of the housing property. When the rate of interest is lower than the rent
every person will think to buy a house instead of renting one. As long the rate on interest rates
will stay lower the new borrowings might sustain the housing market. There is a historic fall in
the interest rate of 9.2% only. The houses are made more affordable as never before.
Recommendation to policy makers: the national policy maker are recommended some
measure to protect the bubble burst in the housing market of London. The prices can be
controlled by provide in loans at lower rates of interests. The demand can be increased by
reducing and revising the tax prices on the housing property and capital gain earned form sale of
these properties. The rents of the housing property can be reduced in order to make houses
affordable.
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CONCLUSION:
In the above assignment it can be concluded that London government had planned to
expand its housing construction and for this it has provided mortgages to the people. In 2009 the
housing market hit rock bottom there was a credit crunch. It took three years of the housing
market to make a pace in the market again by 2013. for next 3 years the prices of housing
proprieties were high, people were unable to afford the rents. While taking into Brexit
consideration at present it is uncertain to tell where the market will go as post Brexit effect will
be know after 29th march 2020. at present the housing market is in price bubble as it is yet to be
seen how it is handled with proper measures so that it does not bust out for the worse.
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Illustration 7: future demand forecast

REFERENCES
Books and Journals
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Beswick, J and et.al., 2016. Speculating on London's housing future: The rise of global corporate
landlords in ‘post-crisis’ urban landscapes. City. 20(2). pp.321-341.
Burrows, V., 2018. The impact of house prices on consumption in the UK: a new
perspective. Economica. 85(337). pp.92-123.
Fethi, S. and Katircioglu, S., 2015. The role of the financial sector in the UK economy: evidence
from a seasonal cointegration analysis. Economic research-Ekonomska
istraživanja. 28(1). pp.717-737.
Gibbs, D. and O’Neill, K., 2015. Building a green economy? Sustainability transitions in the UK
building sector. Geoforum. 59. pp.133-141.
Grabs, J., 2015. The rebound effects of switching to vegetarianism. A microeconomic analysis of
Swedish consumption behavior. Ecological Economics. 116. pp.270-279.
Leishman, C., 2015. Housing Supply and Suppliers: Are the Microeconomics of Housing
Developers Important?. Housing Studies. 30(4). pp.580-600.
Muellbauer, J., 2018. Housing, Debt and the Economy: a Tale of Two Countries. National
Institute Economic Review. 245(1). pp.R20-R33.
Storey, D., 2017. Six steps to heaven: Evaluating the impact of public policies to support small
businesses in developed economies. The Blackwell handbook of entrepreneurship, pp.176-
193.Storey, D., 2017. Six steps to heaven: Evaluating the impact of public policies to
support small businesses in developed economies. The Blackwell handbook of
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Online
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Housing prices. 2018. [Online]. Available through:<
http://landregistry.data.gov.uk/app/ukhpi/browse?from=2006-12-01&location=http%3A
%2F%2Flandregistry.data.gov.uk%2Fid%2Fregion%2Flondon&to=2016-12-01>.
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