Credit markets

As from 2003 the United Kingdom has witnessed incredibly strong price increases for owner occupied houses. This has placed UK house prices amongst the highest growing among European countries. Comparing to the UK’s earlier housing market booms of the late 1970’s and late 1980’s which were marked by fast increasing prices, and later succeeded with a sharp and extended house price deflation lasting until the Mid- 1990’s, the UK’s recent occurrence of price rises has surpassed its remarkable precedents both in its time and size (Aoki eta all, 2001).

The optimistic UK housing market has also been affected by the prolonged crisis in worldwide credit markets originating in the US mortgage market in 2007. The number of property transacted throughout the first half of 2008 fell sharply due to the fall in house prices at the end of third quarter of 2008 by 10% as compared to the their peak in the third quarter of 2007 Factors that determines demand for owner occupied housing in the UK Demand for owner occupied housing in the UK is determined by various factors.

For every transaction that takes place in the UK, depends on the price that the seller is willing to sell their houses to the buyer and the actual price that buyer is willing and able to pay. These factors include the following:- a) Population size, growth and demographic changes, The population size determines the demand for houses. Inflow of population into an area causes an increased pressure on market prices. Population increase will mean increased demand for more houses. Birth and mortality rate changes and inward migration are the main causes for growth in the number of household in the UK.

Aged people in the UK tend to live in a one-person household which also leads to demand for more houses. Separation rate for married couples also influence as it increases the demand for houses. The UK population growth remarkably accelerated between 1996 and 2006 compared to the proceding ten years. The net inward migration accounted for 60% of UK population growth between 1996 and 2006. Demographic changes in sex and age structure accounted for further third. The relatively fast increase in population since 1990s is expected to go on until 2026.

This increase is determined by constant inward migration, rising separation rates of couples and a high tendency for individuals to form households. b) Income of individuals Individual income is the main factor that determines one’s ability to pay for owner occupied house. Increased individual income indicates rising demand for owner occupied houses. It also means that improved standards of living lead to the demand for more expensive houses. When consumers anticipate income increase in the future they would plan high for houses.

Between 1995 and 2007, actual income for individuals increased by 27% and over the same period actual house prices increased by 168%. This weakened the affordability of owner occupied houses. Studies in the UK proved that there is a link between individual income and house prices. c) Interest rates The Interest rates influence the cost of financing a house purchase hence demand. It helps to determine investment and borrowing decisions as it enables one to calculate the true cost of borrowing.

Lower interest rates attract more people as it lowers the cost of debt- financing. Studies by econometric found out that actual interest rates are important in determining house price movement. Household with access to enough credit are in a position to buy a house but household with inadequate credit have no choice to renting until they have raised enough deposit. The reduction in mortgage interest rates boosted equally the capability to pay for housing as well as the ability of the people to service a larger mortgage for certain income.

d) Future expectations for owner-occupied houses When consumer anticipate the economy to go down in the future they will become pessimistic concerning their economic situations and they therefore reduce their demand for owner-occupied houses. Likewise the number of consumers who purchases owner-occupied houses increases when the economy has high growth rates. The anticipation of capital gain in the future makes the demand for owner-occupied houses to go up. Most people invest in owner-occupied houses because they hope for capital gain to go up in the future.

e) The price of owner occupied houses Many household wish to have purchased houses earlier in life so as to benefit from capital gains. Rental costs may as well be viewed as the actual cost of home, which increase as demand would grow faster than supply. f) Transaction costs and taxation of housing The cost of a transaction affects demand for housing in general and for owner-occupation. Transaction costs in the UK mostly are in the form of stamp duty, tax levy at increasing rate on the total sale price of the house and paid by the purchaser.

Rates for stamp duty as from 1997 have increased gradually and are due to high stamp duty which was reintroduced following their elimination in 1984. The doubling of stamp duty considerably improved the level of transaction and it saved a buyer a maximum of ? 1200. g) Government policy as a determinant of demand for owner occupied houses The government policy affects the housing sector in a number of ways. Government imposes taxes a stamp duty on housing properties. By the government regulating the prices for owner- occupied houses, it ensures that the people of the UK are able to purchase houses at reasonable and affordable prices.

The government also regulates prices so as to ensure that the consumers are not exploited by the seller with high price. The trends in house prices since the beginning of 2003 In the recent years demand has been low for owner occupied houses. This has resulted to stagnate prices for houses. The supply for owner-occupied houses in the UK is quite inelastic. This has been due to the delay in price changes and rise in the supply of new houses. Market prices increases and the quantity of houses traded increase fairly when demand moves outward and supply of houses is inelastic.

The pressure on prices is expected to go down as supply becomes more elastic and an increase in the quantity of house sold and purchased. Conclusion The demand of housing is anticipated to continue being less elastic since houses are necessaries of life and they will continues to be purchased no matter the price for shelter. The monopolist in housing industry will continue to charge high prices for houses in regions whose demand is less elastic and charge low prices in areas where demand is more elastic.


Aoki K, Proudman J & Vleighe G. Why house prices matter, Bank of England Quarterly Bulletin, Winter, 2001. Bank of England. Financial Stability Report, Issue no 24, October 2008, retrieved from: http://www. bankofengland. co. uk/publications/fsr/2008/fsrfull0810. pdf Barker. Review of Housing Supply: Securing Our Future Housing, 2004. Retrieved in http://www. hm-treasury. gov. uk Davey, M. Mortgage equity withdrawal and consumption, Bank of England Quarterly Bulletin, Spring, 2001.