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Importance Of The Housing Market To The Uk Economics Essay

Introduction Housing is one of the basic necessities and the housing market has been of paramount importance to the UK economy for monetary policy in past decades. Generally, people buy a house out of need; potential home buyers seek properties that should offer the best possible value in terms of quality and price. And since people’s needs differ according to their income, requirements as per family status and lifestyle, the housing market is significantly fragmented.
The beginning of the new millennium generated a house price boom, and this was followed by a growing trend in demand for housing. Figures from the Nationwide Building Society’s house price data show that the average house price in 1998 was £81,722, but in the third quarter of 2007 the average price peaked at £184,131 – a total increase of 125%. [1]
The tough competition among mortgage lenders to sell mortgages at low interest rates and with no deposit requirements led to an explosion in credit. The people’s inability to pay back their loans led to a banking crisis, which resulted in a severe credit crunch by the end of 2008 (Chamberlin, 2009, 36). Consecutively, the recession led to a dramatic increase in unemployment and inflation rates, triggering consumer’s confidence to the UK market, and as a result, house prices started to fall rapidly in 2008. The average house price reached its lowest point, of £149,709, in recent years in the first quarter of 2009 (see Appendix: Table 1). [2] At present, even though that the the UK economy is being in the midst of the economic crisis house prices have started to go up and seem to have stabilized from August 2009. According to the Halifax «the average price of a house was £165,528, which is still 4.7% lower than October last year». [3] Can this be regarded as a recurring event or is it a sign of a true revitalization of the housing market? To answer this question first we have to examine the demand and supply in the housing market.
DEMAND ‘Demand refers to the expected number of goods consumers will buy, given the price of the good, the price of other goods, incomes and tastes’ (Jones, 2004, 86).
There was a strong demand for housing in the UK in the early years of 2000 due to high levels of employment, low interest rates (Chamberlin, 2009, 33), and influx of foreign workers seeking a better life in the UK with London as top destination. Also, demographic factors such as increasing life expectancy and an escalating number of divorces affected the demand for housing.
Finance is also an important determinant related to demand for houses. People are price sensitive and they always try to purchase goods that would offer them the best value in terms of quality and money. Most house buyers in the UK acquire a property through a mortgage lending, but not all people have access to mortgage packages, especially now where most lenders ask for a deposit of 25 per cent down payment (Chamberlin, 2009, 35). The recession has led banks and mortgage lenders to be very selective when it comes to lending. However, according to the financial information provided by Moneyfacts, lenders are making it easier for borrowers to obtain a mortgage. While CML(Council of Mortgage Lenders) data suggest that limited affordability has affected the proportion of first-time buyers. In 2006, 40 per cent were assisted while in 2009 the number increased by 80 percent. CML states that in due course consumers will be even more constrained. [4]
So demand for houses is influenced by:
Changes in price of houses and prices of available substitutes (ie.Rented properties). and complements.
Changes in real income, credit availability, interest rates.
Consumer’s tastes as per lifestyle, location, family status.
SUPPLY In the UK housing market the last decades there has been a sluggishness in the supply of new properties. As argued in the Barker review (Barker, 2004) by 2021 215.000 houses per year should be built if supply is to keep up with demand (see Appendix: Table 2).
There is a limited supply of new houses due to planning regulations, shortage of land and construction lags(Barker, 2008). Hence, supply is inelastic in the short run.
It is estimated that in the years to come, the number of households in the UK will raise from 24.553.000 recorded in 2001 to 33.002.000 by 2031 (see Apendix: Table 3).
According to the law of supply, more houses will be available in the market when house prices go up. When house prices start to fall due to external factors such as an economic recession or a political crisis, the suppliers will withdraw houses out of the market for they don’t want to lose money. Then, due to a mismatch of properties wanted, and properties offered, the house prices will be pushed up again and so on (see Appendix: Table 4).
Price Elasticity “The responsiveness, or elasticity, of the quantity demanded to changes in key economic determinants of demand, such as price or income (Jones, 2004, 89).
The price elasticity of demand for houses measures the responsiveness of the quantity demanded to a given change in its price.
It could be argued that when house prices go up the demand for buying houses would go down. However, the housing market is a unique market because houses are a necessity for the majority of people.
So, price elasticity:
Reflects the degree of responsiveness of house-buyers
Depends on the degree of the importance of the purchaseƒ Most houses are a necessity.
Is affected by the availability of close substitutes such as rented properties and complements.
Income Elasticity of Demand «Income elasticity of demand measures the relationship between changes in
consumption of a good following an increase or decrease in income» (Jones, 2004).
As illustrated in Table 5 Income elasticity of demand can be either positive or negative. For a normal good the income elasticity of demand is expected to be positive, while for an inferior good it is expected to be negative” (Brickley, Smith, Zimmerman, 2009, 134)
Expected incomes are as important as current incomes in affecting demand.
Houses are normal goods but according to people’s preferences we can identify two types of housing, necessity housing for people who are price sensitive and luxury housing for that margin of people who have the resources to proceed with such a purchase.
Cross Price elasticity of demand “The cross price elasticity of demand relates changes in the quantity
of demand for good X to changes in the price of another good Y” (Jones, 2004)
In the housing market substitutes to owned properties are the rented properties. So when there is an increase in rent prices, more people may choose to buy a property instead of staying in rent and vice versa.
In my opinion it could be argued that mortgages and loans can be regarded as complement goods to house purchases since a high availability in mortgage lending leads in higher number of properties purchased. However, I acknowledge potential flaws in such a statement. Hence the cross elasticity is negative for complements ( Brickley, Smith, Zimmerman, 2009, 134)
Conclusion At this point, I consider the recent upward shift in house prices as mostly related to a shortage of supplied properties, as well as to an increasing demand affected by low interest rates rather than demand-side and supply-side factors. However, this cannot be regarded as a generalization since the house market will always be fragmented owing to multiple trends reflecting the variety of buyers’ financial dynamics.

The Changes Of The Coffee Market Economics Essay

Since 1995, the changes of coffee market, along with changes in the world economies are also changing. However in this diversity commodities market, a price change caused by the reasons for the coffee market is definitely not single. Instead, many of the common cross-cutting factors together. Changes in coffee market have two main aspects. One is the demand market, and the other is supply market. Changing of demand market is affected by personal income and tastes. Also changes in supply market are affected by input prices and technology. While the coffee market is changing every day, we feel like less. This is because the oligopoly.
The demands for a good will rise or fall if there are changes in factors such as, income, the price of substitute goods and complementary goods, and tastes (123HelpMe, 2011). People’s incomes increase, their demand for most normal goods will rise. (John Sloman, Keith Norris, Dean Garratt, 2010). Today the coffee has become increasingly common in the world, so there are great new coffee demand markets in Asian countries which originally drink tea. However, the 1997 Asian Financial Crisis hindered economic growth. The unequal international monetary relations has brought the world debt problem in most countries, and caused numerous international economic issues. One year later Russian Financial Crisis. Then in 2001, Bursting of dot-com bubble made the economy of the whole world crash. Changes in the world economy will affect people’s income, thus affecting the purchasing power of people on the coffee. Financial crisis reduce people’s purchasing power, so demand market decrease, and supply more than demand. At this time the manufacturers to cut prices to attract customers to buy coffee. So between 1997 and 2001, the price of coffee steep dropped from US $135 per bag to US $45. As people’s income is limited, when customers buy the coffee, people will choose to purchase their favorite one. The choosing is also affecting the change of coffee market.
Tastes are affected by advertising, fashion, observing other consumers, considerations of health and experiences of consuming the good on previous occasions (John Sloman, Keith Norris, Dean Garratt, 2010). There are two basic categories of coffee in the world. One is Arabica, the other one is Robusta. There are some differences between these two coffee beans. Arabica beans with 100% high quality blends, and produce a superior taste in the cup, being more flavorful and complex. On the contrary, Robusta beans with lower quality and cheaper blends, and it produce a bitterer brew, with a musty flavor and less body (kaffee.netfirms). Because, more people find the Arabica coffee good, the more they were demand from 2007 to 2009/2010 than Robusta. In the economic market, demand market and supply market exist simultaneously. Both of them are interdependent. Therefore, the fctors causing changes in the coffee market, not only in demand market, but also exist in the supply market.
The change in supply can be caused by a change in production costs, technology and the price of other goods (123helpme, 2011). Costs of production will rise if wages, raw material prices, rents interest rate or any other input prices rise. (John Sloman, Keith Norris, Dean Garratt, 2010). In previous two years, the world’s NO.3 coffee exporter, Colombia was hit by bad weather, and cutting production by about a third its norm (Jack Kimball, 2011). Because of climatic reasons, the Colombian coffee growers fail to achieve the target goal, and not be able to meet the demands of the current coffee market. So the cost of production increases. From the Table of ICO, we can see that the price of Colombia Milds goes up from $205.71in March 2010 to 300.68 in March 2011.
Furthermore, Technological advances can fundamentally alter the costs of production (John Sloman, Keith Norris, Dean Garratt, 2010). With the global technology advances, more and more new technology is introduced into the production of coffee. For example, there are two ways to removing and dry the coffee beans from the fruit before roasted them, namely dry and wet methods. Comparing these two methods, the wet method requires the use of specific equipment and substantial quantities of water. It ensures the intrinsic qualities of the coffee beans are better preserved. Hence, the coffee produced by this method is usually regarded as being of better quality and commands higher prices (ico.org, 2011). The high technology makes the goods with a better quality than before, so the price of coffee which produces by equipment has higher price. Although many financial reports have shown that the price of the coffee market in recent years varies widely. People seemed to feel less of this change. This is because oligopoly.
Oligopoly occurs when just a few firms between them share large proportion of the industry (John Sloman, Keith Norris, Dean Garratt, 2010). Firms under oligopoly engage in collusion, and a formal collusion agreement is called a cartel. Firms may agree on prices, market share, and advertising expenditure and so on. (John Sloman, Keith Norris, Dean Garratt, 2010). Firms under cartel, they agree to influence prices by regulating production and marketing of a product ( allbusiness). There are two largest coffee exporters, Brazil and Colombia (Larry S. Karp, Jeffrey M. Perloff, 1993). Although the bad weather influence the production of coffee, Brazil and Colombian act like large firm in that each centrally controls exports. The Brazilian Coffee Institute and Colombian Federation of Coffee Growers control supply and price, and set quotas within the coffee market. So the costs of production are relatively stable. Moreover, in the trading market, about 50 percent of the world production of coffee is bought by only four huge companies, namely, Kraft, Nestle, Procter and Gamble, and Sara Lee. These four companies formed the oligopoly in the trading market. They will collude and control the price of coffee in trading market.
In conclusion, cause the coffee market is due to the changing in demand market, and the other is production market. Changing of demand market is affected by personal income and tastes. Also changes in supply market are affected by input prices and technology. In addition to these two main reasons, oligopoly is another major reason to affect coffee market. That is reason, why while the coffee market is changing every day, we feel like less. Although since 1995, the changes of coffee market, along with changes in the world economies are also changing and these changes was to make the coffee market crisis. Through the use of professional knowledge of economic analysis the coffee market and the whole market, we can find reasons that led to crisis, and then using scientific methods to help get rid of coffee market crisis and take measures to prevent the same situation from happening again in the future.
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