Economic Analysis of UK House Prices: Factors, Policies, and Impacts

This report provides an analysis of the factors influencing house prices in the UK. It begins by examining key economic drivers such as economic growth, interest rates, consumer confidence, supply factors, and mortgage availability, illustrating their impact on the housing market. The report then delves into how government policies, specifically monetary, fiscal, and import policies, affect house prices. It discusses the mechanisms through which changes in these policies influence the demand and supply dynamics within the UK housing market, ultimately affecting price levels. The report concludes by summarizing the complex interplay of economic factors and government interventions that shape the UK housing market.

MANAGERIAL
ECONOMICS

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
Part A...............................................................................................................................................3
Part B...............................................................................................................................................6
The extent to which government policies can affect house prices..............................................6
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8
ILLUSTRATION INDEX
Illustration 1: UK House price index...............................................................................................4

INTRODUCTION
House is the dream of every person and in order to purchase same one accumulate lots of
money but sometimes due to poor economic conditions if become impossible to purchase house.
In order to understand the factors that affect house prices some of the factors are taken in to
account in the report. These factors are economic growth, interest rates, consumer confidence,
supply factor and mortgage. These factors greatly influence house price in the UK. In the second
part of the report some of the policies that affects house price in the UK are discussed in detail
the policies that are discussed in the report is fiscal, monetary and import policy. The impact of
change in these policies on the UK house price is discussed in detail in the report.
Part A
In UK house price index is increasing consistently from the from the month of April 2015
to till the date. In the month of April the house price index was 635 and same in the month of
January 2016 is 687 (). This plunge in index value is indicating that number of houses increased
in the UK and due to this reason price of the houses also increased in the mentioned nation.
Some of the factors that greatly influence house prices in the UK are as follows. Economic growth- It refers to the rate at which an economy is growing in the specific
time period. An economic growth is measured in terms of the GDP growth rate. It can be
seen that from the month of January 2013 the GDP growth decreased from 0.7 to 0.5 till
the date. Between this duration GDP increases many times but it again reduced and this
means that there was no stability in the UK GDP growth rate (Disney, Gathergood and
Henley, 2010). When growth rate of economy fluctuate trade declines and inflation rate
get increased. This lead to reduction in saving rate of the people and increased
unemployment. In the UK during economic downturn inflation was in control but
unemployment rate get increased. On, other hand population was increased consistently
and due to this reason demand for house increased. On the other hand, many types of
metals are used for building a house and price of this material was increasing consistently
due to slow down in the demand for base metals in the international market (UK house
prices. 2016). Due to import of raw materials at high price cost of house also increased in
the UK. All these things happen because economic condition of the UK and other major
global economies was not good. UK had strong business relations with the developed

economic nations and due to this reason poor economic condition of these economies
also affects UK economy. Slow economic growth of the UK and other nations lead to
elevation in price of raw material that are used to build house and increase in population
was another factor that increase demand for houses. Hence, in the UK these are two
factors that affect house prices.
 Interest rates- Interest rate is another reason that is largely contributing to increase in the
house price in the UK. When the central bank increases in interest rates commercial
banks get a loan at a hiked interest rate. This increase finance cost for the bank and same
pass burden of increase in cost on the end customers which is general public (Van
Nieuwerburgh and Weill, 2010). Due to increase in interest rate people get a loan at the
higher interest rate. This is the reason due to which interest payment burden on the people
get increased. From long time period interest rate in the UK is stable but in FY 2011
these rates were very high and at time it was very difficult to borrow loan at higher
interest rates. This is the reason due to which house price in the UK does not increased at
the rapid rate in the UK. This can be seen from the chart given below.
 After 2011 stability comes in the interest rate and these rates become low and due to this
reason demand for the houses increased in the UK. Due to elevation in demand house
Illustration 1: UK House price index
(Source: Van Nieuwerburgh and Weill, 2010)

prices increased at rapid rate in the UK. Hence, it can be said that interest rate to great
extent affects the houses prices in the London. Customer confidence- This is a big factor that play key role in the growth of the house
price in the UK. In order to understand this thing it is necessary to understand the term
consumer confidence. This term refers the extent to which people are optimistic about the
growth of the nation or specific thing in the UK. Consumer confidence survey is
conducted time to time by the research firms to make predictions. In the UK people have
a strong confidence that economy will come on track and due to this reason demand for
houses will certainly increase in the UK (Bjørnland and Jacobsen, 2010). Further increase
in population will be another factor that would contribute to growth of the real estate
sector in the UK. Due to strong optimism about price of the houses people start making
investment in the houses and this lead to increase in demand of houses in the UK.
Currently, investment in shares, mutual funds and gold is not safe and this is another
factor that is creating positive sentiments among the people in respect to investment in
the real estate in order to earn high capital gain in the upcoming years. Supply factor- This is another factor that greatly influence house prices in the UK.
Ireland is also a part of the UK. In Ireland during 1996-2006 7, 00,000 houses were built
and in the FY 2007-08 recessions comes in existence which negatively affects UK
economy. Due to recession property market collapsed in Ireland and there was large
supply of vacant homes to the people and due to low saving rate in higher unemployment
rate there was no demand in the market (Adam, Kuang and Marcet, 2011). This was the
reason due which price of the Irish houses fall by 50% when recession was at peak.
Hence, supply and less demand was also one of the factors that greatly influence price of
houses in the UK.
 Mortgage availability- From 1996-2006 there was very high demand for houses in the
UK and banks as well as other financial institutions were ready to give more and more
loan to the people for purchase of the houses. Till the time when recession comes in
existence higher amount of loan was already distributed and banks were giving loan
amount up to five times of the people income (Canarella, Miller and Pollard, 2012). Due
to recession unemployment increased at a rapid rate and large number of people declare
themselves bad debt. As a result banks NPA increased at a rapid rate. NPA refers to the

non performing asset which is property for the firm but no return is given by that asset.
Banks start following cautious approach and due to this reason they start distributing low
amount of loan to the people. Hence, fund availability reduced for the people and this
was the reason due to which post recession demand for the houses decline in the UK.
Part B
The extent to which government policies can affect house prices
Some of the government policies that affects price of the houses are as follows. Monetary policy- It is a policy that is used to control money supply in an economy. There
are some of the components of monetary policy like CRR, SLR and open market
operations. By making changes in the CRR and SLR rates money supply is increased and
decreased in an economy. If money supply increases in the economy then income level of
the people also increase which lead to increase in demand for houses in the UK. If
demand increased then house prices will certainly increase. In this regard central bank of
UK will reduce CRR which is also known as cash reserve ratio. When CRR increase then
fewer amounts is distributed as loan to the banks. Due to availability of less amount
banks find it difficult to give loan to each and every person (Attanasio, Leicester and
Wakefield, 2011). Increase in CRR lead to less availability of loan which results in less
demand for houses. Low demand ultimately results in fall in prices of the houses in the
UK. If CRR decreases then vice verse happened and in this way CRR affects house price
in the UK. On the other hand, there is an open market operations by using which central
bank inject or withdraw liquidity from economy. In the open market operations central
bank buys and sell securities and if it buy securities then banks receive cash from the
central bank because they are seller to the mentioned apex bank. In case banks sale
securities to the central bank then mentioned bank makes a payment to the banks. If
securities are purchased by the central bank then liquidity will be increased in the market
which will lead to availability of more loans to the people (Ferrero, 2015). This will
result in to increase in demand and price of house in the UK. In this way monetary policy
of the government affects house prices in the UK. Fiscal policy- It is a policy in which tax and public expenditure decisions are taken by the
government. Under this policy government can reduce tax amount and if this is done then

people saving rate can be increased to some extent which will result in increase in
demand for houses in the UK. In same way if public expenditure will be increased in the
UK then also lots of employment opportunities will be generated. This will lead to
revival in demand for houses in the UK. Hence, fiscal policy of the government to large
extent affects demand for the houses from the people side in the UK. In same way if in
recession in order to meet requirements government increase rate of taxes then its
treasury will increase but people sentiments about investment in real estate will be
negative (Vansteenkiste and Hiebert, 2011). This is because they will always make a
perception that increase in tax rates will reduce their saving rate. Moreover, they may
assume that recession will lead to increase in inflation rate. Due to this reason they will
focus on meeting their main needs instead of building houses for themselves. If every
person will form such type of perception then investment in houses will decline. If same
will happen then house price will fall. From this it is clear that fiscal policy certainly
affects house prices in the UK.
 Import duty- Import duty is another factor that influence price of the houses in the UK.
IN making of house many raw materials are required and base metal is specially needed.
These metals are imported and other raw materials are also purchased from other nations
(Chen, Chien, M.S. and Lee, 2011). If these things are purchased at heavy price then
higher import duty further increase price of the raw materials that will be used for house
manufacturing. Hence, if government intends to reduce price of houses then it can reduce
import duty which will to some extent curb growth of house prices in the UK.
CONCLUSION
On the basis of above discussion it is concluded that there are many factors that influence
house prices in the UK. Government of UK needs to set its priorities and accordingly it can
shape it monetary and fiscal policy in order to fulfill its preferences. Some of the factors like
prices of the imported raw material are out of control of the UK government but it can reduce
import duty in order to keep prices of the houses low in the UK. By doing this purchasing of
house can be made affordable for the people. Hence, there are lots of things on which
government can work.

REFERENCES
Books & journals
Adam, K., Kuang, P. and Marcet, A., 2011. House price booms and the current account. In
NBER Macroeconomics Annual 2011, Volume 26 (pp. 77-122). University of Chicago
Press.
Attanasio, O., Leicester, A. and Wakefield, M., 2011. Do house prices drive consumption
growth? The coincident cycles of house prices and consumption in the UK. Journal of the
European Economic Association. 9(3). pp.399-435.
Bjørnland, H.C. and Jacobsen, D.H., 2010. The role of house prices in the monetary policy
transmission mechanism in small open economies. Journal of financial stability. 6(4).
pp.218-229.
Canarella, G., Miller, S. and Pollard, S., 2012. Unit roots and structural change an application to
US house price indices. Urban Studies. 49(4). pp.757-776.
Chen, P.F., Chien, M.S. and Lee, C.C., 2011. Dynamic modeling of regional house price
diffusion in Taiwan. Journal of Housing Economics. 20(4), pp.315-332.
Disney, R., Gathergood, J. and Henley, A., 2010. House price shocks, negative equity, and
household consumption in the united kingdom4. Journal of the European Economic
Association. 8(6). pp.1179-1207.
Ferrero, A., 2015. House price booms, current account deficits, and low interest rates. Journal of
Money, Credit and Banking. 47(S1). pp.261-293.
Van Nieuwerburgh, S. and Weill, P.O., 2010. Why has house price dispersion gone up?. The
Review of Economic Studies. 77(4). pp.1567-1606.
Vansteenkiste, I. and Hiebert, P., 2011. Do house price developments spillover across euro area
countries? Evidence from a global VAR. Journal of Housing Economics. 20(4). pp.299-
314.
Online
UK house prices, 2016. [Online]. Available through: <
http://www.telegraph.co.uk/finance/property/house-prices/>. [Accessed on 23rd February
2016].