Monetary Policy and Housing Market Analysis

The assignment provides an in-depth analysis of the relationship between monetary policy and the UK housing market. It explores how the Bank of England's decisions on interest rates affect house prices and the demand for housing. The report also examines empirical evidence from recent years, highlighting how changes in interest rates have impacted the housing market. The conclusion drawn is that loose monetary policy implemented by the Bank of England has improved the growth of the UK housing market.

Running head: PRINCIPLES OF ECONOMICS
PRINCIPLES OF ECONOMICS
Name of the Student
Name of the University
Author’s Note

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Table of Contents
Introduction......................................................................................................................................3
Demand and supply in UK housing market.....................................................................................3
Monetary policy of the Bank of England to the UK housing market..............................................4
Conclusion.......................................................................................................................................6
References........................................................................................................................................7

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Introduction
The report focuses on the demand and supply and monetary policy of the Bank of
England to the UK housing market. The Bank of England plays a vital role in the UK housing
market by setting the interest rate, which in turn influences the cost of attaining mortgage. The
UK housing market has huge significance as change in price of houses impacts the value of
residence wealth and growth of the nation (Wilcox and Perry 2014). This study also highlights
on the empirical evidence from actions of Bank of England and hypothetical examples from the
UK housing market.
Demand and supply in UK housing market
Price of houses reflects both the supply and demand and thus equilibrium price occurs
when present demand meets the available supply of houses. In the housing market, supply has
been relatively inelastic as it takes huge time in building new residence. Hence, rise in demand
have big impact on the price of houses. Over the last few years, the housing demand in UK has
increased continuously while its supply has remained stable. As the residence building in UK in
present years is one of the lowest among the European countries, it contributes to the increasing
level of average house prices. In addition, interest rate set by the Bank of England is also one of
the vital determinants of the housing demand in UK (Tsai 2013). Less reduction in rate of
interest triggers to huge rise in property demand. In addition, low rate of interest also leads to
low mortgage rates, which in turn motivates new entrants to purchase another residence as
investment. Moreover, with lower rate of interest, the individuals with excess amount to invest
will attain higher return from investment in property. As a result, this drives up the prices of
houses.

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P
P
1
Q Q1
S
D1
D
Quantit
y
Average House
price
Figure 1: Demand and supply in housing market of UK
Source: (As created by author)
Monetary policy of the Bank of England to the UK housing market
The policymakers of the Bank of England have implemented looser monetary policy for
the housing market in UK. It has been stated by Gelain, Lansing and Mendicino (2013) that,
lower rate of interest stimulates the activity in the economy. The main reason behind this is that
low interest rate decreases the cost of borrowing. This raises the consumer’s disposable income
with mortgage payment and also motivates the consumers spending. They have cut the interest
rate for triggering growth in the housing market of UK (International Business Times UK 2018).
Decline in interest rate leads to decrease in the mortgage cost and increase in purchasing
power of money. As a result, this leads to increase in demand for residence in UK. Moreover,
looser monetary policy also leads to increase in prices of housing owing to increase in demand

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and shortage in supply of residence (Sá 2015). According to the report of the Royal Institution of
Chartered Surveyors ( RICS), the weakness in the UK housing market will continue in this year
due to shortage in supply of house. Recent data from the Bank of England also highlights that the
mortgage approvals also increased over the last few year due to decrease in mortgage cost.
Another example also highlights that the price of houses in UK also picks up under huge
pressure of housing shortage (Monaghan 2018). Some of the lenders of this bank also said that
low rate of mortgages in the present years are also offsetting squeeze on the income of
households. Recent evidences also reflects that the housing market in UK picked up in the year
2017 with rise in total number of mortgages owing to looser monetary policy. Even the data
provided by the Bank of England shows that this increase in housing has been highest as
compared to last three years. It has also been revealed that total number of purchasers buying
new residence in this nation hits 10 year highest in 2017.
Figure 2: Increase in average prices of residence in UK

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Source: (Wilcox and Perry 2014)
Conclusion
The conclusion that can be drawn from the above report is that increase in the price of
houses encourages total spending of consumers and also leads to rise in economic growth of UK.
It also enables the residence owners to take bigger mortgage. In addition, housing prices also
influences the Bank of England’s lending practices. This also improves the assets value of the
Bank of England. Hence, loose monetary policy implemented by the Bank of England also
improved the growth of housing market in UK.

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References
Gelain, P., Lansing, K.J. and Mendicino, C., 2013. House prices, credit growth, and excess
volatility: Implications for monetary and macroprudential policy.
International Business Times UK. (2018). What the Bank of England's interest rate cut means for
the UK housing market. [online] Available at: https://www.ibtimes.co.uk/what-bank-englands-
interest-rate-cut-means-uk-housing-market-1574346 [Accessed 13 Mar. 2018].
Monaghan, A. (2018). UK house prices pick up but still under pressure, says Nationwide.
[online] the Guardian. Available at: https://www.theguardian.com/business/2017/nov/01/uk-
house-prices-nationwide-market [Accessed 13 Mar. 2018].
Sá, F., 2015. Immigration and House Prices in the UK. The Economic Journal, 125(587),
pp.1393-1424.
Tsai, I.C., 2013. The asymmetric impacts of monetary policy on housing prices: A viewpoint of
housing price rigidity. Economic Modelling, 31, pp.405-413.
Wilcox, S. and Perry, J., 2014. UK housing review. Coventry: Chartered Institute of Housing.