“Finance Availability Is the Single Most Important Variable in Determining Movements in Residential Property Prices”.

Topics: Real estate, Monetary policy, Inflation Pages: 5 (2215 words) Published: April 8, 2013
Many would agree that this view is true to an extent. If a person has the money then they are more likely to move houses as they can afford to. However, there are many in the position where they wish to move but cannot financially. So they have to stay where they are until they can afford to move to a different house. But many factors affect the prices of houses, the biggest being demand. The way to obtain finance is mainly through the banks, as they lend money to those who are potential buyers in the residential market, which is namely a mortgage. There are many mortgages available on the market, however the interest rates affect whether a person would take out a mortgage; they will be more likely to take out a mortgage that has the lowest interest rate, and thus banks try to compete with one another to offer a product that ticks all the boxes for a consumer. Since the recession in 2007, banks have become tighter with their lending due to the risk attached with lending mortgages. This has impacted upon people’s financial availability to purchase a house. Before the recession, which was due to the sub-prime mortgages in the US, banks were lending money to those people who they knew that could not pay back the loans. As a result, more money was going out of the banks than coming in and thus the banks started to become bust as they could not run a bank with no money. To deal with the matter, the UK Government used the fiscal policy to help the UK to get out of the recession. ‘The fiscal policy involves the use of government spending, taxation and borrowing to influence both the pattern of economic activity and also the level and growth of aggregate demand, output and employment’ (Tutor2U, 2006). The Government uses the fiscal policy with the aim to put cuts in personal income tax and tax on interest from saving as well as indirect taxes (Tutor2U, 2006). This in effect would enhance people’s disposable income which will generate consumer demand to improve the economy and reduce the rate of inflation to the Governments’ target of 2% (Economics Help – Fiscal Policy, 2011). In effect, as mortgages’ became difficult to obtain house prices started to increase as there was a high demand for them, making it more difficult for people to purchase a house. The International Monetary Fund suggested that house prices in the UK, Ireland and Australia were 20-30% higher than can be justified by rising incomes or population growth (Jones and Watkins, 2009; p1). The deposit that is now required for a mortgage is 20% and the interest on the mortgage is high. However, recent research shows that ‘mortgages are at their lowest at an average of 12.3% since January 2004’ (The Independent, 2011). The post-war period also has a hand in the effect of house prices. After the war a lot of damaged was caused to residential areas, which resulted in new housing areas being built. ‘Big construction went under and reached its peak in the 1960s’ (UK Housing Wiki, 2011). ‘In the early 1950s, the Government encouraged a period of rapid economic expansion’ (Isaac, 1994). The interest rates were decreased and thus investment opportunities were greater than long-term loans. Many houses became in demand and eventually house prices started to increase over the years. In addition to buying a house the Government encouraged the council to sell or rent houses to people so that they can afford to move for whatever reason; these houses are effectively called council houses. The houses are sold to people at a discounted price through rent, which eventually the person owes. This was bought about after the post-war effects as the Government had stated that the maintenance of the houses were not their responsibility but the councils. Nevertheless, this was proven not to be very effective. This shows that finance availability is the most important variable in determining movements in residential property prices. David Isaac (1994; p3) stated that...

References: Books
• ISAAC, D.I, 1994
• Jones and Watkins, C.J & C.W, 2009. Housing Markets & Planning Policy. 1st ed. UK: Wiley-Blackwell.
• Griffiths and Wall, A.G & S.W, 2011. Economics for Business & Management. 3rd ed. Essex: Pearson Education Ltd.
• Post-war period - UK Housing Wiki. 2011. Post-war period - UK Housing Wiki. [ONLINE] Available at: http://ukhousing.wikia.com/wiki/Postwar_period. [Accessed 11 December 2011].
• Macroeconomics - Fiscal Policy. 2011. Macroeconomics - Fiscal Policy. [ONLINE] Available at: http://tutor2u.net/economics/revision-notes/as-macro-fiscal-policy.html. [Accessed 11 December 2011].
• Fiscal Policy - Economics Help. 2011. Fiscal Policy - Economics Help. [ONLINE] Available at: http://www.economicshelp.org/macroeconomics/fiscal-policy/fiscal_policy.html. [Accessed 11 December 2011].
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Webber, R.W, 2011. The Owner Occupied Residential Property Market. Leicester: De Montfort University.
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