Housing Prices

A Study of the United Kingdom Housing Price-the influence by Micro and Macroeconomic factors

By

Housing Prices DECLARATION I, would like to declare that all contents included in this dissertation stand for my individual work without any aid. This dissertation has not been submitted for any examination at academic as well as professional level previously. It is also representing my very own views & not essentially which are associated with university.

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Housing Prices ABSTRACT This study focuses on the various micro and macro economic factors effecting on the housing prices. To enhance the research housing prices of United Kingdom

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affected by the economic factors were taken in to account. This study also describes the UK House Prices and GDP Growth Trends Analysis.

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Contents
CONTENTS........................................................................................................................................IV CHAPTER 1: INTRODUCTION........................................................................................................1

1.1 Outline of the Study.......................................................................................1 1.2 Background of the United Kingdom house market.......................................1 1.3 Research Aims and Objectives......................................................................4 1.4 Ethical Concern.............................................................................................4
CHAPTER 2: LITERATURE REVIEW...........................................................................................6

2.1 Micro Economic Factors That Affect House Price........................................6 2.1.1 Gross Domestic Product.............................................................................6 2.1.2 Gross National Product (GNP)...................................................................8 2.1.3 National Income........................................................................................10 2.1.4 Inflation.....................................................................................................14 2.1.5 Interest Rates............................................................................................16 2.1.6 Interest Rates on Mortgages.....................................................................17 2.2 Macro Economic Factors That Affect House Price ....................................18 2.2.1 The Credit Crunch and Property...............................................................18 2.2.2 Global Financial Market...........................................................................19 2.3 Economic Indicators....................................................................................23 2.4 Theoretical Housing Analysis......................................................................25 2.4.1 Housing Subsidies....................................................................................25 2.5 Credit Market Liberalisation........................................................................26 2.6 An Increase in Public Expenditure on Housing...........................................27 2.7 An Increase in House Price Dispersion.......................................................28
CHAPTER 3: METHODOLOGY.....................................................................................................30

3.1 Mixed Method Research..............................................................................30 3.2 Research Design and Process......................................................................32 3.3 Applied Research.........................................................................................33 3.4 Research Purpose ........................................................................................33 3.5 Research Context ........................................................................................34 3.6 Emphasis on Validity ..................................................................................35 3.7 Research Design .........................................................................................37 3.8 Reliability and Validity................................................................................38 3.9 Generalisability............................................................................................39 3.10 Ethical Considerations...............................................................................39
CHAPTER 4: DISCUSSION.............................................................................................................41

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4.1 UK House Prices and Consumption............................................................41 4.2 Debt and Equity Withdrawal.......................................................................46 4.3 Mortgage Equity Withdrawal......................................................................47 4.4 UK House Prices and GDP Growth Trends Analysis.................................48 4.5 UK GDP Growth Forecast...........................................................................48 4.6 UK House Prices Valuation against GDP Growth Trend Projection..........50 4.7 The Price of the House and its Involvement in the Economy.....................51 4.8 The Effect of Falling House Prices..............................................................52 4.9 Characteristics of Housing Cycles...............................................................54 4.10 Interest Rates on Mortgages and Housing Prices......................................55 4.11 The Credit Crunch and Property Investment.............................................57 4.12 The Credit Crunch and Property Development.........................................58 4.13 Economic Instability and Macroeconomic Policy.....................................59
CHAPTER 5: CONCLUSION...........................................................................................................61 CHAPTER 6: BIBILOGRAPHY.................................................................................................60-64

Housing Prices 1 CHAPTER 1: INTRODUCTION

1.1 Outline of the Study This research focuses on the various economic factors effecting on housing prices and its impact and comprises of the following chapters: In Chapter 1 an overview of the topic will be briefly illustrate by giving a background of the UK house market and the effects of the global financial crisis on the UK market. The research aims and objectives and ethical concern also carry out at the end of Chapter 1. Chapter 2, theories of micro and macro-economic factors which may influence the house market will be examine and further argument will be discuss in Chapter 4. Chapter 3 briefs the research methods in this d writing, the progress of the design, and the difficulties that faced through. Chapter 4 of this dissertation examines the impact of the both micro and macroeconomic influence on the UK house market and identifies the extent of the contraction in market output. Chapter 5 of this paper brings together the key discussions and draft a conclusion of the present state.

1.2 Background of the United Kingdom house market The price of house market is determined by two prospects; micro and macroeconomic influences. Gross Domestic Product (GDP), Gross National Product (GNP)

Housing Prices 2 National Income, and other uncertain factors such as unemployment rate, inflation, mortgage approval rate and etc are classify as micro-economic influences. In the other hand, the global financial market, economic Indicators, credit market liberalization, housing Subsidies and etc are the macro-economic factors. The UK housing market has experienced a large boom between 2003 and 2008, then bust from the end of 2008 until present. The housing boom happened as a period of rapid GDP growth, increased of foreigner investment funding and the deregulation of the mortgage market. In the other hand, the bust concurred by credit crunch caused by the U.S. subprime mortgage at end of 2007. The termination of the sub-prime mortgage market in the US was the catalyst for the credit crunch, but the effect on global money markets did not apparent right away. Since the credit crunch spread globally in 2008, the UK economic activity has declined at the first half of 2008 and standstill by the end of the second quarter, it affected in both residential and business investment. Even government investment had initially provided some stimulus but as the fallout from the financial crisis gathered drive the previously strong labor market weakened dramatically, which leading to a significant increase in unemployment. In 2009 Office of National Statistics has announced that the United Kingdom is officially in recession that contracted 1.5% in the fourth quarter of 2008, and further falling of 0.6% in the third quarter. The total contraction drop 2.5% at the end of December 2008, which is the greatest contraction since 1982. (Office of National Statistics, 2009) Moreover, the number of unemployed people reached to 1.92 million by the end of November 2008, the highest figure since September 1997. Redundancy levels also

Housing Prices 3 increased significantly from 225,000 to 78,000 by the end of November 2008. Furthermore, In 2009 Office of National Statistics has announced that the United Kingdom is officially in recession (Office of National Statistics, 2009)

Furthermore, the housing market, the price of oil, a loss of confidence in the financial institutions and a contraction in bank lending are the main drivers of the recession. In this introduction the housing market will be enlighten briefly and the remaining drivers will be discussed in other chapters. During the boom period, enormous of theories believes that house prices in western society would only ever go up, some analysts even constructed complicated theories to rationalize what was fundamentally impossible. The sense of well-being and satisfaction that homeowners derived from the rising housing market meant that such explanation was perfectly pleasant. However, when the market went bust it shown that they were defied rational thinking and ignored the cyclical nature of property markets. (Oswald, 2009) Above and beyond, financial innovation has played an important role in the globalization of money and property markets in recent years. The growth in new finance vehicles such as derivatives and asset backed securities has exploded significantly. The innovation has improved liquidity and enabled investors to spread risk through international diversification. Nevertheless the weakness is that the global implications of the current downturn are more profound than anything previously, as highlighted very acutely following the collapse of the sub-prime mortgage market in the US.

Housing Prices 4 1.3 Research Aims and Objectives This research aims to find out the affect of micro and macro economic factors on the housing prices of United Kingdom. These factors may be Credit Crunch, Global Financial Market Liquidity, Credit Market liberalisation, Unstable Oil Price, GDP, National Income, inflation Rate, Interest Rate, mortgage grounded and Credit supply condition

1.4 Ethical Concern Researchers will be fully involved in this awareness of ethical issues. All projectrelated processes and ethical issues are the principal investigator responsibilities. Of such a study will be conducted, the integrity of the enterprise will remain and negative consequences, may reduce the potential of future research will be the way to avoid. The choice of the research questions will be based on the best scientific judgments and the effectiveness of a potential participant in the assessment of risk and the social commitment by the participants. The study will involve an important issue of intellectual property rights. The researchers are aware of any potential harmful effects, in which case the method chosen and after consultation with colleagues and other experts to use. The method for selecting good reason will be given. The study will be a competent manner as an objective and unbiased scientific projects. The study will be carried out with standard and fully comply with local customs laws and regulations knowledge. Researchers are and respect the host culture familiar. In the 'principal investigator own moral principles, clear to all involved in this study to other researchers with knowledge of cooperation. Potential conflicts will be resolved before the start of the study. The study will avoid the individual or community; they studied

Housing Prices 5 the life of improper invasion. The welfare of informers has the highest priority, their dignity and privacy interests of at any time will be protected. Freely given informed consent of all subjects, such as libraries that provide access to literature sources will be used.

Housing Prices 6 CHAPTER 2: LITERATURE REVIEW

2.1 Micro Economic Factors That Affect House Price 2.1.1 Gross Domestic Product GDP is the monetary value of goods and services produced by an economy in a given period. GDP is a proxy indicator that helps to measure the growth or decrease in production of goods and services of companies in each country, only within their territory. This indicator is a reflection of the competitiveness of enterprises. (Buck, 2002, Pp. 125-140)

GDP is a measure of economic activity in the country. And this measure is calculated by adding the total value of annual production of Felt goods and services. On this basis, the gross domestic product is equal to private consumption plus investment plus public spending plus the change in stocks plus exports minus imports. Often are evaluated GDP at market prices by subtracting indirect taxes and adding subsidies. However, it is also possible to calculate the GDP through what is called a cost factor. This measure more accurately reveals the income paid to factors of production. The addition of income earned by residents from investments abroad and paid income raised by the country to foreign investors to give us the value of the gross national product. And can be removed from the impact of inflation during the calculation of GDP growth in real terms under way. However, some economists believe that a nominal GDP should be the primary objective of economic policy. They justify this by saying that this kind of gross domestic product will be remembered that the policy makers take the impact of their decisions on

Housing Prices 7 inflation, as well as on growth. And can be calculated as gross domestic product in three ways: Income method: It involves collecting income residents on the territory of the country (from individuals and companies) resulting from the production of goods and services. Method of production: It involves collecting the value of production of the various sectors of the economy. Expenditure method: involves the collection of the total expenditure on goods and services by individuals and companies before deducting the value of extinction and capital consumption. (Voicu, 2008, pp. 241283) Since the production of someone's income is another person to become in turn to spend all those roads that should lead to identical results. However, this rarely happens because of the congruence and statistical flaws. In addition, rule out the methods of production and income undeclared economic activities that occur in the black market economy, but those activities can be calculated by a method of expenditure. And may show some resentment about the economic transformation GDP measure to the goal of economic policy because it is not full of well-being scale. This index does not include aspects of the good life activities such as comfort. Nor does it include economically valuable activities, but that does not pay to do, such as parent education for their children to read. However, it contains something that would reduce the quality of life, such as those that leave serious damage to the environment.

Housing Prices 8 Some Clarification on GDP The GDP of a country will increase if the government or companies from the same borrow abroad, obviously, this will decrease the GDP in future periods. (Shiller, 2007, pp. 24-50) It does not take into account the depreciation of capital (This includes machinery, factories, etc., as well as natural resources, and could also include the "human capital"). For example, a country can increase its GDP intensively exploiting its natural resources, but the decrease capital, leaving less capital available for future generations Does not take into account negative externalities generate some productive activities, such as environmental pollution? The residents of a country with per capita GDP as another but with a more equitable distribution of that enjoy higher welfare than the latter The measure of GDP does not account for productive activities that impact the well but did not generate transactions, such as volunteer work or housewives Activities that adversely affect the welfare may increase the GDP, for example divorce and crime

2.1.2 Gross National Product (GNP) Gross National Product (GNP) - is the primary indicator of economic condition of society. It is defined as the aggregate market value of the total final output of goods and services in the economy in one year. GNP is money. To correctly calculate the total

Housing Prices 9 production requires that all products and services were taken into account once (to exclude double counting). To do this, take into account only the final products and intermediate products are excluded. (Oswald, 1996, Paper No. 475) Under the final product to understand goods and services purchased for final use. Goods and services purchased for resale or for further processing or treatment, are intermediate products. They are excluded from GNP, as the cost of the final product already includes all the intermediate transactions took place. Thus, the cost of the final product is composed of what are added firms at each stage of processing. The difference between the market price of products manufactured by the company and the value acquired by it from suppliers of raw materials is called value added. If we take the sum of value added by all firms, we obtain the market value of total output (GNP). When calculating GNP excludes non-productive transactions, which include: 1. Purely financial transactions: there are three types a) Transfer payments from the state (unemployment benefits, social security payments, etc.) - as their receivers do not make any contribution to the creation of the current GNP; b) Private transfer payments (e.g. monthly subsidies received by students from home) - as they are the act of transfer of funds from one individual to another; c) Securities transactions - as not directly imply an increase in production. Sale of used items - as these transactions does not reflect the current production. Thus, we can estimate the market value of the final product (and hence GDP) by looking at how all consumers spend money on his purchase or summarise all the value added. Therefore, the GNP can be determined either by summing up all the costs for the

Housing Prices 10 purchase of the total volume produced in a given year of production, either by adding together all income derived from the production of total output this year. Equivalence of these methods of calculation based on the fact that what is spent on manufacturing the product, is the income for those who invested their resources in the production of this product and its placing on the market. (Muth, 2006, pp. 2996)

2. The calculation of GDP expenditure To measure the GDP for expenditure required to summarise all the costs of creating the final product and services. This includes personal consumption expenditures (C), gross private domestic investment (Ig), government purchases of goods and services (G), net exports (XA).

2.1.3 National Income National income is, strictly speaking, a monetary valuation of income received or accrued during a given period by residents of a country as owners of production factors. National income includes wages and salaries, rents, interest and profits, not only in the form of cash payments, but as revenues employer contributions to pension funds, income from self-employed and undistributed profits of corporations. (Munch, 2006, pp. 9911013) In a market economy such as United Kingdom, the evaluation of national income includes, with certain exceptions, the only economic activities related to the sale of goods and services markets. The few exceptions are in the form of imputed values, adding in an

Housing Prices 11 estimated rental income of owner-occupied housing, and income that farm families derive from self-consumed to produce their farm. Meanwhile, official estimates and almost all those established by the private sector do not include the value of all services rendered at home by unpaid homemaker. This important omission is serious if one uses the national income to measure well-being of the population of a country. As such, the assessment of national income is equivalent to exactly what the net output of goods and services would bring the market if we did not add anything else to the prices of goods and services. It is therefore a measure of the net value of goods valued at factor cost (of production). However, the prices at which goods are traded on markets include indirect taxes such as sales taxes and customs duties. In the system of national accounts, these taxes and provisions for depreciation and obsolescence in addition to net national income at factor cost for the assessment of "gross national product at market prices." (Mankiw, 1989, pp. 235258) In United Kingdom, the official estimate of national income is made by Statistics UK. By collecting a wide range of economic data and other statistics, Statistics United Kingdom obtained incidentally useful information for evaluation of national income and other related data specific to the national accounts. If necessary, the agency conducts studies for the specific purpose of collecting data for the estimation of national income. In addition, it can obtain information that was provided to other agencies, such as tables prepared from the tax returns of corporations and individuals. The components of national income in official accounts presented in part depend on the available data. Compensation of employees, the largest component, is one, because this information can be obtained from such sources as the census of manufacturing firms, the reports filed by financial institutions

Housing Prices 12 and tax returns. Similarly, we obtain, from the same sources, the following estimates: property income, depreciation or rental value of equipment involved in production, natural resources and entrepreneurship, which are reported as interest income rental and corporate profits. Net interest and dividends paid to foreign residents are not included. Income selfemployed unincorporated must be evaluated in another way. Farmers' incomes are estimated by subtracting expenses from revenue generation from the sale of farm products. Farm income that results is a combination of earned income, that of the farmer and his family unpaid, and income property. Income of other unincorporated businesses, such as those with professional activities or who belong to the service sector or trade, are calculated the same way or, in some cases, from the collections of taxes income. (Mayer, 2008, 20-59) Indirect taxes and deductions (depreciation) added to the national income to determine the GDP are taken from government files and records of companies and others. Some imputation of depreciation is necessary in some cases, such as those involving buildings, government property, and homes occupied by their owners. National accounts include four major categories of expenditures: purchases of consumption and procurement of new equipment by businesses, governments and individuals, government purchases, and net exports of goods and services. The estimate of these costs reflects the actual prices paid for goods and services. Spending on capital goods include both capital expenditures that correspond to the amortisation of existing production capital, and those that cover the net increase in equity. The sum of these expenditures gives the gross national expenditure (GNE). The gross domestic product (as opposed to GNP) is the monetary measure of the value of all goods and services produced in United Kingdom, regardless of whether a

Housing Prices 13 portion of the income thus generated can return to residents of other countries. Gross national product (GNP) measures the goods and services available to residents of United Kingdom. GDP exceeds GNP to the extent that interest and dividends paid abroad are higher than those received from abroad. The UN encourages its members to standardise their methods of calculating national income, but must be interpreted with care comparisons made between the various national incomes per capita, for three reasons. First, the exchange rate used to convert these estimates into a common currency, so that we can draw a comparison, does not reflect the comparative prices in each currency for goods traded internationally (prices Comparative properties beyond the international trade may not be reflected at all in the exchange rate). Then, the magnitude of non-commercial production and, consequently, the share of production that does not take into account the national income estimates vary widely among countries (developing countries usually have production sectors relatively large off-market). Finally, the habits of consumption are very different from one country to another and comparisons of money income may not reflect the effect of these variations on the wellbeing of a population. (Oswald, 1996, Paper No. 475) Comparisons are also made based on a time scale in a single country. National income and related estimates are usually calculated to begin in the prices of the position period (usually one year). In comparisons from one year to another, aggregates, usually the national expenditure estimates are reduced price indices to cancel the effects of price changes on changes in overall production. We then say whether measured in constant prices, the price of a particular year.

Housing Prices 14 2.1.4 Inflation Inflation is the continued growth and general price of goods and services and productive factors in an economy over time. Other definitions explain how the persistent upward movement in the general level of prices and declining purchasing power of money. (Mankiw, 1989, pp. 235258)

Fiscal Deficits: Financing Through the Issuance and Inflation The fiscal deficit is a potential trigger an inflationary process. On the one hand, if we start from a position of balance between aggregate supply and aggregate demand, increased government spending without being accompanied by a similar increase in tax revenues, create both an excess of aggregate demand, as increased in the fiscal deficit. This is the evidence the Keynesians and trigger inflation. (Mayer, 2008, 20-59) The monetarists also assume that is an excess of aggregate demand which turns the inflationary process, but differ in the Keynesian as to the cause that generates this excess demand. Since its inception, is an increase in the money supply through greater availability of liquidity, leading to increased aggregate demand? Therefore, if the State, after having exhausted all sources of private credit, used to be financed through increases in the issuance of currency, it will generate a cash surplus that will result in excess demand and general increase in prices . When a government carries a heavy debt, each time it becomes more difficult to get proper financing. When credit sources are exhausted and persistent deficits, governments often resort to printing money as a last instrument to finance its expenditure. The issue is not genuine, i.e. an increase in the supply of money is not accompanied by an increase in the

Housing Prices 15 demand for money, generating an increase in prices. Financing a deficit by issuing different effects depending on whether a system of fixed exchange rate or flexible. As will be seen, countries with chronic budget deficits and high magnitude, would find it extremely difficult to maintain a fixed exchange rate and make the choice to move to floating exchange rate, or at least make frequent adjustments of the parity monetary. (Hamilton, 2005, Pp. 150-160)

Explanation of the Concept of Exchange Rate While the central bank has to hold foreign currency exchange rate, inflation will remain under control given that international prices do not vary and include compliance with the law of one price. Thus, the government can keep the price level to fund their expenses through the issue. But this is a solution that cannot be sustained for long, because if the government insists to finance its deficits by creating money, will only deplete the central bank. When residents warn that the country's central bank may not maintain the value of the currency change faster domestic assets by foreign assets, to guard against the possible loss of value to the future suffer devaluation. Finally, when the central bank reserves reach their limit, there is no choice but to let the currency depreciate. The process ends with the abandonment of the fixed exchange rate, whether devaluing and setting a higher value of the exchange rate or allowing the currency to float freely. The collapse of a system of fixed exchange rate when reserves are depleted central bank is called balance of payments crisis.

Effects of Inflation on the Economy of a Country

Housing Prices 16 The effects of inflation are to some extent as it can be expected or unexpected. Whatever form it takes inflation, entails costs and the higher the rate of price changes the higher the costs. There are costs of holding money, so that operators spend more time discussing what to do with their money balances. The inflationary process involves, for dealers, real costs to update the prices. The steady increase in the general price level has redistributive effects in favour of debtors, in the distributive struggle employees and all those who depend on fixed nominal incomes will reduce their real income. Finally, as has been studied by a researcher, inflation also causes costs to the treasury due to the delay between the time of incurring the expenses and revenue collection. (Haines, 2007, pp. 1635) There are two types of inflation: on the one hand we have what is known in advance and incorporated into the expectations of economic agents, on the other hand, inflation may be unanticipated by economic agents, which is presented before that individuals have adjusted their expectations.

2.1.5 Interest Rates Interest rates are the price of money. If a person, company or government needs money to buy goods or to finance their operations, and requests a loan, the interest you pay on this loan will cost you'll pay for that service. As with any product, fulfils the law of supply and demand: while it easier to get money (more choice, greater liquidity), the interest rate will be lower. Conversely, if there is not enough money to lend, the rate will be higher. (Green, 2007, pp. 91112)

Housing Prices 17 Net interest and dividends paid to foreign residents are not included. Income selfemployed unincorporated must be evaluated in another way. Farmers' incomes are estimated by subtracting expenses from revenue generation from the sale of farm products. Farm income that results is a combination of earned income, that of the farmer and his family unpaid, and income property. Income of other unincorporated businesses, such as those with professional activities or who belong to the service sector or trade, are calculated the same way or, in some cases, from the collections of taxes income. How interest rates affect the economy? Low interest rates help grow the economy, facilitating the consumption and therefore demand products. As more products are consumed, more economic growth. The downside is that consumption has inflationary tendencies. High interest rates encourage savings and curb inflation, consumption decreases with increasing the cost of debt. But by reducing the consumption also slows economic growth.

2.1.6 Interest Rates on Mortgages Interest rate is the value of fees charged for lendable material or money that is paid by the borrower (the loan recipient) to the creditor (lender). Channel percent is surplus value, which is created during the production using loan funds, net business income. The magnitude of the percentage rate of general economic factors affects the value and volume, term, security and types of loans. Interest rates are of several types and are classified depending on the types of markets, the economic content of the transaction on the terms of the transaction.

Housing Prices 18 2.2 Macro Economic Factors That Affect House Price 2.2.1 The Credit Crunch and Property The full impact of the credit crunch on property markets will be felt through the inter-related effects that it will have on investment, development and occupational demand. The effects in the property investment market were among the first to appear and have already resulted in sharp changes in investment activity and pricing. The impact on development will become more apparent going forward in the amount of new construction activity. Impacts on occupational demand will be a consequence of the effect that the credit crunch, alongside other economic influences, has on real economic variables including business investment, employment, consumer spending and retail sales. These in turn will feed through to occupational demand for commercial property, interacting with property supply to determine rental levels. The demand/supply balance in the market and resulting rental trends will in turn feed-back to pricing and decisions in both the development and investment markets. The diagram below illustrates the flow of effects from the debt market to the property market and the feed-back loops involved. (Gould, 2005, pp. 411422)

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2.2.2 Global Financial Market The stock market is an important channel for financing investment, which represents a market for capital accumulation and that its ability to deploy capital, as is the case in areas other investment, on the one hand and its close association with important market economics on the other hand, as well as the emergence of a calendar currency exchange rates and prices interest at the international level, which led in many cases to the absence of any impediments to capital flows Authority Consumer credit and saving a variety of foreign currencies, especially since the evolution of financial markets that came in the wake of economic developments and the expansion of consumer spending and investment, where she developed institutions for the recruitment of savings in various areas of economic productivity, as a link between individuals and institutions that are saving and productive projects in the economy. (Glaeser, 2003, pp. 3782) In a market economy such as United Kingdom, the evaluation of national income includes, with certain exceptions, the only economic activities related to the sale of goods and services markets. The few exceptions are in the form of imputed values, adding in an estimated rental income of owner-occupied housing, and income that farm families derive from self-consumed to produce their farm. Meanwhile, official estimates and almost all those established by the private sector do not include the value of all services rendered at home by unpaid homemaker. This important omission is serious if one uses the national income to measure well-being of the population of a country.

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Structure to Deal in International Securities Markets Investing in the stock market investment fields between the tasks that require the development of the foundations for the success of investment operations in this area, so as to achieve a successful choice for a variety of securities in the market without sacrificing expected returns from such investments. Thus, the investment decision in this market depends on a host of data including: 1. The amount of Return: This reflects the sise of the profits or losses obtained by the investor, which is often expressed as a percentage of capital invested. 2. The degree of risk: The likelihood of risks with the expected or what is called the element of uncertainty (Uncertainty) in the evaluation of projects, as the shares that carry returns or refunds related to not necessarily carry the same levels of risk, forcing the investor to develop an assessment of access to the cases of the balance between rates profits and the resulting risks and form in which it makes its decision as to the truth. 3. Time: The purchase of securities limited period of time as determined under the time that keeps the investor in stocks and bonds, as the time factor associated with the type of company, and the look of the investor and the forecast for growth and development, and so can determine the controllers fundamental in the securities market including the following:

Interest Rate

Housing Prices 21 Affects the different interest rate adversely on stock prices, since higher interest rates lead to lower transaction process in the financial markets, and vice versa, the lower interest rates works to promote the deal in the financial markets, The measurement of the degree of such effects are using the rates of change in assets and liabilities that are affected by these changes or fluctuations.

Liquidity It is the existing cash available to the investor or the bank or financial institution that will ensure dam needs so as not to be forced to sell securities in his possession which may cause loss sometimes is measured to identify the proportion of liquidity and financial investments to total deposits or assets.

Credit This highlights the role of master of banks and financial institutions in cases of nonability of the issuer of the securities to pay in times of assessments, particularly when different balance between loans and credit and the proportion of loan losses.

Capital The case of the ability or inability to cover securities issued Okiem especially when there are losses; which requires attention to this element and control of property rights enjoyed by the bank or financial institution or the individual investor. This requires the investor who wants to fight the deal in international financial markets to a range of information to allow it the opportunity to take the decision with full

Housing Prices 22 knowledge of the circumstances resulting from their decisions (Glaeser, 2003, pp. 2129). Information that can be divided into what is a former investment decision, and what is later to him, especially those that allow the investor appreciation of one's choice and no choice of securities or bonds, including the information that preceded the follow-up elements of its portfolio, and the decisions of Entries summarise the characteristics of stocks and bonds raised, and the status of bodies and exported as well as conditions of the subscription itself, but it is often characterised by the market (market International Securities Exchange) lack of clarity of what investors and find out what they take positions and follow the behaviour even through the media sources available, especially for financial institutions to joint banks big and investment funds began to play a role in the stock market and international bond does not disclose only rarely and are vague about the policy of the investment, which often rely on the element of intuition and the impact of psychological factors, along with the handle surface information available, and therefore the issue of dealing in these markets depends on two things: First: the importance of the role played by securities dealers and brokerage houses for the guidance of investors and advises them and assists them in how to rationalise and make decisions Second: the importance of working to increase awareness of the investors what they are doing or providing it and the need to increase their knowledge of various aspects of the market that they want to participate or dealing in them Where the market for international securities are an independent institution governed by the conditions of art is different that the economic situation of the company or even the economic situation as a whole does not necessarily reflect price trends - as is the

Housing Prices 23 commodity market - they have put the company well, as well as economic situation is solid, however that prices could move towards decline, and vice versa, periodic price may be affected by the events of a technical or psychological or emotional perspective. Thus emerged two types of stocks and bonds in the financial market, a class which respond to the market and slowly, and another class act more effectively in such circumstances; analytical approach technical market requires identifying the best times to enter the market, which shows the difference between the investor and successful investor is successful.

Mechanism to Deal in Global Financial Market Issued securities either denominated in currencies other than real circulation in the State of the States and this is often either in units of cash "account" or "vehicle" does not traded already and is only used as units of measure, and because of its advantages of real currency in order to avoid what would happen to the currency fluctuations may harm the interests of dealers in the financial market and are handled in this market according to the indicators by which to identify trends that exercised by investors and speculators and financial analysts in financial markets. (Gaspar, 1998, pp. 136156)

2.3 Economic Indicators Influenced by the price movement of stocks and bonds in the financial market economic indicators, which in turn reflect the validity of predictions in the market, such as that of the Declaration on the budget for a large financial or approach an ambitious investment, which means the expectation of rising prices in general, and to inject additional funds the market would be reflected in the status and conditions of the securities in the

Housing Prices 24 stock market in the newly industrialised countries in the way of growth and thus to adopt the statistics of industrial production or GDP or disposable income as indicators in the stock markets in developed countries. (Frew, 2002, pp. 1725)

Indicators of Monetary and Fiscal One of the most important indicators for the knowledge of price trends in the financial market as higher interest rates lead to the trend for investors to deposit in the banks, and to sell their shares in the market standing, supply and prices drop while moving funds into the financial market in case prices fall interest in the banks or converted to the bond market. The increase in money supply, whether in the economies of countries emerging in the way of growth or developing lead to higher stock prices, otherwise, the low rates of growth in money supply will lower stock prices, and therefore the intervention of central banks to expand the money supply or reduce it reflected a shift rates interest on the increase or decrease and then to influence the price trends in the financial market accordingly. (DiPasquale, 1996, Pp. 75- 120)

Volume in the Stock Market The number of shares and bonds traded on the stock market determines the strength of the market and the expectations of the future rise or fall as the volume density means investor optimism and motivation to invest in the market and the consequent rise in prices as a result. If the market has not advanced or presentation, accompanied by heavy trading,

Housing Prices 25 then prices remain unchanged or are in decline because of the relative stagnation of the post, and thus draws investors to liquidate their investments as prices continue to go down directions. It is here we can see that the intensity of trading and price increases that generate demand for and followed by successive increases after that .If demand is not alone that leads to the increase in prices in financial markets. Thus, the characteristics of this market is different than it is in the investment markets and markets for consumer goods, a mechanism which reflects the effectiveness of the investment process in those markets, and of the following:

2.4 Theoretical Housing Analysis 2.4.1 Housing Subsidies Housing allowances for housing subsidies, in practice, take many forms, but the macro-economic literature tends to overlook the differences. Most questions, however, can be illustrated by considering the impact of declining tax mortgage interest. There are many studies, initially in the U.S. context, signs of increased demand for owner occupation (and housing prices) in the 1970's combination of tax subsidies and the high rate of general inflation. It is easy to show that high inflation reduces their costs of occupying property. Some authors have concluded, therefore, that housing subsidies have led to excessive investment in housing construction in comparison with other forms of investment (especially in industry) and the growth in real house prices. Despite these findings were robust to a series of specifications, there is, however, flaws in the argument and conclusions, which were modified with the broader macroeconomic framework. First, the conclusion does not hold if households can not take

Housing Prices 26 what you want, that is, if you are faced with credit constraints. If there are restrictions, subsidies lead to mortgage queues longer, rather than changes in prices and investment. In general, therefore, we must be careful political statements that the tax subsidies for housing leads to lower long-term economic growth by reducing production in other sectors of the economy. As an alternative, the consumers costs can be condensed. This entails that reducing the tax mortgage interest help in recent years in the UK is likely to turn down in real prices for housing and / or losing the house, but also to decrease savings. But the gauge does not perform anything to get better the hurry of economic growth.

2.5 Credit Market Liberalisation This issue is still present in the macroeconomic literature, despite the liberalisation of mortgage markets in the UK began more than ten years. Nevertheless, the attention of most macro-economic literature on the impact of liberalisation on the overall consumer demand, is rather than the demand for housing. Here, however, we are particularly concerned about Deregulation has increased the demand for housing and housing prices therefore real. Common conclusion in the case of the United Kingdom was the fact that the greater availability of funds raised so much and, in fact, the sector gear on the UK household debt has risen sharply over the decade 1980. Debt to income, for example, is much greater than in Germany or France. Despite the deregulation in itself could be expected to increase in prices, sometimes forget that deregulation was originally accompanied by tighter monetary policy, i.e., higher interest rates. This, in effect, prevents price increases to the weakening of monetary policy at the end of the decade. This was the main reason why the liberalisation measure was originally

Housing Prices 27 designed as a policy to improve efficiency, has been dominated by concern about the unintended consequences of aggregate demand. (Buck, 2002, p. 125-140) 2.6

2.6 An Increase in Public Expenditure on Housing Increased public spending on housing is expected that the cost of new housing is constantly raised, 500 million a year. This is done to show the impact of an increase in demand. Look at the results in the four years since 1995, although the starting point is crucial. The results are presented in Table 2. In this and all subsequent tables, values are expressed as differences from the baseline scenario. Although the values are expressed to two decimal places, is illustrative and, of course, exaggerates the degree of accuracy. Increased government spending will increase aggregate demand and hence GDP directly, but also a direct impact on GDP is not so great. Effect is known as "crowding out" and support is often said that growth in demand can not continually increase GDP. In our model there are two reasons for this conclusion. Firstly, the increase in demand will raise prices in the construction sector - although the extent will depend on the pressure of demand in the industry - both primary Nominal inputs produces less in real time. In addition, increased demand will raise prices in other parts of the economy, which led to the widespread decline in demand, for example, consumers costs. Secondly, the increase in government spending can lead to a reaction in financial markets, which requires an increase in interest rates. We saw in the previous section that an increase in public debt will require the private sector to hold government debt. If this happens (the model assumes a slight increase in interest rates always practice raised more amounts), then a movement of private consumption and investment can take place. In addition, the impact on private housing may be

Housing Prices 28 counterproductive. Most empirical studies in several countries have found that individual housing is sensitive to changes in interest rates. If so, then the increase in public housing can be implemented through private pension schemes. In addition, private housing can be a negative relationship with the public outing with the recent increase in reduces the demand for senior housing prices, and depression. In our case, however, additional public spending in part by lower private consumption. This, in turn, suggests that employment in the construction industry can be expanded, but in practice, reducing employment in other parts of the economy. Ball & Wood (1994) review of the literature on job creation in the construction of various forms of construction costs. However, this analysis does not take into account the negative impact on employment in other parts of the economy.. (Muth, 2006, pp. 2996)

2.7 An Increase in House Price Dispersion The increase in the variance in house price of the final simulation investigated the effects of changing the variance in housing prices between the south-east and the UK as a whole. Analysis and our model predict that real wage growth dispersion of the product by reducing output and employment. This is an example of the effect of food-induced distortions in the housing market. These effects, however, may not be permanent. The famous "domino effect" is to update the regional prices over time, and so modelling assumption that the additional differential of two percentage points remained for four years, probably close to maximum, although the short term, increase the spread is often higher than two percentage points in the past. Within four years, however, enough time for the main effect is evident.

Housing Prices 29 After four years, rising unemployment may be more than 100.000. Housing prices will remain broadly constant in real terms and the main negative economic consequences would have been out of the construction industry. Construction employment, however, is expected to fall, the direct impact of rising real wages. As mentioned above, changes in real wages of the construction industry plays an important role in explaining the decline in employment during the last recession. (Munch, 2006, p. 991? 1013) Variation in prices between the south-east and the rest of the country, however, has declined considerably since 1990, and since the effects appear roughly symmetrical, one would expect wage pressure has been reduced. The inability of wages to accelerate during the economic recovery has been particularly notable feature in comparison with other phases of recovery. Although it is unlikely to be wholly or even mainly, due to narrowing regional differences in housing prices may have been a factor. The implication is that policies that can reduce the range of prices could contribute to the growth potential of the UK.

Housing Prices 30

CHAPTER 3: METHODOLOGY

3.1 Mixed Method Research This research approached data gathering using the multi-method strategy, or the combination of quantitative and qualitative methods. Basically, the quantitative approach pursues facts and is employed when researchers desire to acquire statistical truth. According to Gall, Gall and Borg (2003), quantitative research assumes that the social environment has objective reality that is relatively constant across time and settings, while qualitative research assumes that individuals construct reality in the form of meanings and interpretations, and that these constructions tend to be transitory and situational. The dominant methodology in the quantitative approach is to describe and explain features of the objective reality by collecting numerical data on observable behaviours of samples and by subjecting these data to statistical analysis. According to Smith (1983), neutral, scientific language (p. 9) must be used in quantitative research in pursuing exact facts. This means that the research itself must be expressed by universally acceptable digits. In this approach, in order to make generalisability, objectivity of the research is emphasised by using neutral scientific language. On the other hand, the qualitative approach aims to discover meanings and interpretations by studying cases intensively in natural settings and by subjecting the resulting data to analytic induction (Gall, Gall, and Borg, 2003). In Creswells (2001) explanation, quantitative studies are based on post positivist claims for developing knowledge, use experiments and surveys, and collect data on predetermined instruments that yield statistical data. On the other hand, qualitative studies

Housing Prices 31 use constructivist perspectives or advocacy/participatory perspectives, or both, and use narratives, phenomenologies, grounded theory studies, or case studies as strategies of inquiry. In this approach, research facts and researcher's value judgments or interpretations are inseparable. Thus the researcher becomes an insider to the research (Carr and Kemmis, 1986). One of the major benefits of employing quantitative research approach points to generalisability: because the research results are derived by discovering exact facts, the same research methods and the results can be generalised. In short, such approach is applicable to many other situations because of its objectivity and being value-free. As for the qualitative research approach, one of its major benefits is that it highlights the researcher's viewpoint in the research process as well as on its results. Moreover, qualitative studies encompass interpersonal, social, and cultural contexts of project management more fully than the quantitative research approach. Because the researcher's viewpoint takes a central role in the research process, the researcher provides a much richer and widerranging description compared to what the quantitative research approach provides. In reviewing the literature, there are only a few criticisms of the mixed method research approach, and these criticisms point mainly to the question of standards. In their commentary on issues in participatory action research, Riger et al. (2004) pose the question Whose standards are used to evaluate [research] quality, and what are those standards?. The second question seems to be the launching pad of the critics in attacking the mixed methods approach. As a result, the practical issue of how to make judgments about the quality of diverse styles of research is constantly faced by researchers advocating this approach.

Housing Prices 32 Along with this, Eisner and Peshkin (1990) discuss if this is possible to have research values with the unique condition of possessing the qualitative research approach and in what ways can research knowledge be populated if there are no generalizations on the same. Furthermore, the qualitative research approach is imperfect by its character that the investigator controls the research. Bearing in mind the strengths and weakness of quantitative and qualitative advances, the current research employed the values of both quantitative and qualitative research approaches. Vital to the conversation of the rationale following the mixed methods approach is the fact that information is accumulated from a diversity of sources in a variety of behaviors, thus, methodological diversity (Fiske and Shweder, 1986) is desirable. Critics claim that it is impossible to maintain standards across different genres of research. For example, what standards can be used to evaluate a piece of ethnography as well as a randomised experiment? It is suggested that the absence of comprehensive standards makes the mixed methods approach equivalent to anarchy.

3.2 Research Design and Process As discussed above both qualitative and quantitative research designs are used for the study. For the study the main topic of research was turned in to research questions. The data was collected from different sources. Analysing of the data is the most important part of the research as data could be mishandled. After achieving the objective data is analysed critically.

Housing Prices 33 3.3 Applied Research Applied research is inquiry using the application of scientific methodology with the purpose of generating empirical observations to solve critical problems in society. It is widely used in varying contexts, ranging from applied behaviour analysis to city planning and public policy and to program evaluation. Applied research can be executed through a diverse range of research strategies that can be solely quantitative, solely qualitative, or a mixed method research design that combines quantitative and qualitative data slices in the same project. What all the multiple facets in applied research projects share is one basic commonality the practice of conducting research in non-pure research conditions because data are needed to help solve a real-life problem. The most common way applied research is understood is by comparing it to basic research. Basic researchpure scienceis grounded in the scientific method and focuses on the production of new knowledge and is not expected to have an immediate practical application. Although the distinctions between the two contexts are arguably somewhat artificial, researchers commonly identify four differences between applied research and basic research. Applied research differs from basic research in terms of purpose, context, validity, and methods (design).

3.4 Research Purpose The purpose of applied research is to increase what is known about a problem with the goal of creating a better solution. This is in contrast to basic research, in which the primary purpose is to expand on what is knownknowledgewith little significant connections to contemporary problems. A simple contrast that shows how research purpose

Housing Prices 34 differentiates these two lines of investigation can be seen in applied behaviour analysis and psychological research. Applied behaviour is a branch of psychology that generates empirical observations that focus at the level of the individual with the goal of developing effective interventions to solve specific problems. Psychology, on the other hand, conducts research to test theories or explain changing trends in certain populations. The irrelevance of basic research to immediate problems may at times be overstated. In one form or another, observations generated in basic research eventually influence what we know about contemporary problems. Going back to the previous comparison, applied behaviour investigators commonly integrate findings generated by cognitive psychologists how people organise and analyse informationin explaining specific types of behaviours and identifying relevant courses of interventions to modify them. The question is how much time needs to pass (5 months, 5 years) in the practical application of research results in order for the research to be deemed basic research? In general, applied research observations are intended to be implemented in the first few years whereas basic researchers make no attempt to identify when their observations will be realised in everyday life.

3.5 Research Context The point of origin at which a research project begins is commonly seen as the most significant difference between applied research and basic research. In applied research, the context of pressing issues marks the beginning in a line of investigation. Applied research usually begins when a client has a need for research to help solve a problem. The context the client operates in provides the direction the applied investigator takes in terms of developing the research questions. The client usually takes a commanding role in framing

Housing Prices 35 applied research questions. Applied research questions tend to be open ended because the client sees the investigation as being part of a larger context made up of multiple stakeholders who understand the problem from various perspectives. Basic research begins with a research question that is grounded in theory or previous empirical investigations. The context driving basic research takes one of two paths: testing the accuracy of hypothesised relationships among identified variables or confirming existing knowledge from earlier studies. In both scenarios, the basic research investigator usually initiates the research project based on his or her ability to isolate observable variables and to control and monitor the environment in which they operate. Basic research questions are narrowly defined and are investigated with only one level of analysis: prove or disprove theory or confirm or not confirm earlier research conclusions. The contrast in the different contexts between applied research and basic research is simply put by Jon S. Bailey and Mary R. Burch in their explanation of applied behavior research in relation to psychology. The contrast can be pictured like this: In applied behavior research, subjects walk in the door with unique family histories that are embedded in distinct communities. In basic research, subjects come in packing crates from a breeding farm, the measurement equipment is readily available, the experimental protocols are already established, and the research questions are derivative .

3.6 Emphasis on Validity The value of all researchapplied and basicis determined by its ability to address questions of internal and external validity. Questions of internal validity ask whether the investigator makes the correct observation on the causal relationship among identified

Housing Prices 36 variables. Questions of external validity ask whether the investigators appropriately generalise observations from their research project to relevant situations. A recognised distinction is that applied research values external validity more than basic research projects do. Assuming an applied research project adequately addresses questions of internal validity, its research conclusions are more closely assessed in how well they apply directly to solving problems. Questions of internal validity play a more significant role in basic research. Basic research focuses on capturing, recording, and measuring causal relationships among identified variables. The application of basic research conclusions focuses more on their relevance to theory and the advancement of knowledge than on their generalisability to similar situations. The difference between transportation planning and transportation engineering is one example of the different validity emphasis in applied research and basic research. Transportation planning is an applied research approach that is concerned with the sitting of streets, highways, sidewalks, and public transportation to facilitate the efficient movement of goods and people. Transportation planning research is valued for its ability to answer questions of external validity and address transportation needs and solve traffic problems, such as congestion at a specific intersection. Traffic engineering is the basic research approach to studying function, design, and operation of transportation facilities and looks at the interrelationship of variables that create conditions for the inefficient movement of goods and people. Traffic engineering is valued more for its ability to answer questions of internal validity in correctly identifying the relationship among variables that can cause traffic and makes little attempt to solve specific traffic problems.

Housing Prices 37

3.7 Research Design Applied research projects are more likely follow a triangulation research design than are basic research investigations. Triangulation is the research strategy that uses a combination of multiple data sets, multiple investigators, multiple theories, and multiple methodologies to answer research questions. This is largely because of the context that facilitates the need for applied research. Client-driven applied research projects tend to need research that analyses a problem from multiple perspectives in order to address the many constituents that may be impacted by the study. In addition, if applied research takes place in a less than ideal research environment, multiple data sets may be necessary in order for the applied investigator to generate a critical mass of observations to be able to make defensible conclusions about the problem at hand. Basic research commonly adheres to a single-method, single-data-research strategy. The narrow focus in basic research requires the investigator to eliminate possible research variability (bias) to better isolate and observe changes in the studied variables. Increasing the number of types of data sets accessed and methods used to obtain them increases the possible risk of contaminating the basic research laboratory of observations. Research design in transportation planning is much more multifaceted than research design in traffic engineering. This can be seen in how each approach would go about researching transportation for older people. Transportation planners would design a research strategy that would look at the needs of a specific community and assess several different data sets (including talking to the community) obtained through several different research methods to identify the best combination of interventions to achieve a desired

Housing Prices 38 outcome. Traffic engineers will develop a singular research protocol that focuses on total population demand in comparison with supply to determine unmet transportation demand of older people.

3.8 Reliability and Validity The term bias is a historically unfriendly pejorative frequently directed at action research. As much as possible, the absence of bias constitutes conditions in which reliability and validity can increase. Most vulnerable to charges of bias are action research inquiries with a low saturation point (i.e., a small N), limited interrater reliability, and unclear data triangulation. Positivist studies make attempts to control external variables that may bias data; interpretive studies contend that it is erroneous to assume that it is possible to do any researchparticularly human science research that is uncontaminated by personal and political sympathies and that bias can occur in the laboratory as well as in the classroom. While value-free inquiry may not exist in any research, the critical issue may not be one of credibility but, rather, one of recognising divergent ways of answering questions associated with purpose and intent. Action research can meet determinants of reliability and validity if primary contextual variables remain consistent and if researchers are as disciplined as possible in gathering, analysing, and interpreting the evidence of their study; in using triangulation strategies; and in the purposeful use of participation validation. Ultimately, action researchers must reflect rigorously and consistently on the places and ways that values insert themselves into studies and on how researcher tensions and contradictions can be consistently and systematically examined.

Housing Prices 39 3.9 Generalisability Is any claim of replication possible in studies involving human researchers and participants? Perhaps even more relevant to the premises and intentions that underlie action research is the question, is this desirable in contributing to our understanding of the social world? Most action researchers are less concerned with the traditional goal of generalisability than with capturing the richness of unique human experience and meaning. Capturing this richness is often accomplished by reframing determinants of generalisation and avoiding randomly selected examples of human experience as the basis for conclusions or extrapolations. Each instance of social interaction, if thickly described, represents a slice of the social world in the classroom, the corporate office, the medical clinic, or the community centre. A certain level of generalisability of action research results may be possible in the following circumstances:

Participants in the research recognise and confirm the accuracy of their contributions.

Triangulation of data collection has been thoroughly attended to. Interrater techniques are employed prior to drawing research conclusions. Observation is as persistent, consistent, and longitudinal as possible. Dependability, as measured by an auditor, substitutes for the notion of reliability. Conformability replaces the criterion of objectivity.

3.10 Ethical Considerations One profound moral issue that action researchers, like other scientists, cannot evade is the use they make of knowledge that has been generated during inquiry. For this

Housing Prices 40 fundamental ethical reason, the premises of any studybut particularly those of action researchmust be transparent. Moreover, they must attend to a wider range of questions regarding intent and purpose than simply those of validity and reliability. These questions might include considerations such as the following:

Why was this topic chosen? How and by whom was the research funded? To what extent does the topic dictate or align with methodology? Are issues of access and ethics clear? From what foundations are the definitions of science and truth derived? How are issues of representation, validity, bias, and reliability discussed? What is the role of the research? In what ways does this align with the purpose of the study?

In what ways will this study contribute to knowledge and understanding?

A defensible understanding of what constitutes knowledge and of the accuracy with which it is portrayed must be able to withstand reasonable scrutiny from different perspectives. Given the complexities of human nature, complete understanding is unlikely to result from the use of a single research methodology. Ethical action researchers will make public the stance and lenses they choose for studying a particular event. With transparent intent, it is possible to honour the unique, but not inseparable, domains inhabited by social and natural, thereby accommodating appreciation for the value of multiple perspectives of the human experience.

Housing Prices 41

CHAPTER 4: DISCUSSION

4.1 UK House Prices and Consumption Housing wealth may increase, either because the price of existing shares owned by the private sector rises or an increase in this population. He gets up, finally, or, if the net investment in housing before, or if there was a transfer of housing stock in the private sector, public sector, if the market price. The latter was particularly important in the 1980's so that the growth in housing wealth has been more that a period of growth in property prices. However, often quite a strong correlation between housing prices and housing wealth belong to one and sometimes in other cases, others. Cycles of a strong housing market, coupled with the consumption of volatile, were a key element of the UK economy for more than three decades. According to the OECD, in the period 1971 - 2002 1% change in housing wealth in Britain, on average, correlated with the change of 0.07% in consumer spending - a strong correlation between all the countries surveyed. In general, there are similar findings of the Ministry of Finance and the IMF. Recently, the IMF said the UK (together with Finland, Ireland and Switserland) with one of the most pro-cyclical housing markets in the world. Figure 1 shows that there has been a sharp decline in real housing prices in the UK, which has not followed a significant drop in UK GDP (the gray bands). (Green, 2007, pp. 91112)

Housing Prices 42

A recent study by the IMF between countries in the hands of the housing bust is estimated that approximately 40 percent of all housing booms must bust, busts, and they are usually associated with falls in GDP is very high - more than higher than after the stock market bust - the average cumulative loss for several years, up to 8% of GDP. Given this historical evidence, it may seem at first glance that the major correction in consumption and GDP can be expected, if house prices in Britain fell in the next few years. In the end, the UK housing prices in recent very rapid growth in historical terms, at prices many times on long-term historical average of about 2.5% per year. If the house was overvalued, and prices begin to fall, will follow the historical pattern? Depending on the connection between housing and consumer demand, the volatility of housing markets may be more or less the speed of transmission of macroeconomic volatility in general. There are

Housing Prices 43 two possibilities as to why the housing market may be less important factor in macroeconomic instability. Whether it is because of the real estate prices and housing wealth is much more stable than in the past. This seems to be a message - and hope - in the mortgage banking industry at the moment. Moreover, even if prices remain unstable (with the obvious result of the current stability over the long-term bull than anything else) indication to consumption are much weaker than in the past. Bank of England recently suggested that consumption of the United Kingdom may be less dependent on house prices than it was previously believed, and that a further decline in housing prices may be less likely to lead to a significant reduction in consumption and GDP. This agued that correlation between house prices and consumption in the previous cycles do not necessarily indicate a causal relationship, as might have been caused by a common factor, such as expectations of future earnings, that is not directly observable. Simple correlations of data that can not control this factor may give very misleading indications of causality. In this case - and not always seen in the comments to the media on this issue - from the perspective of the bank to stop the decline in home prices in the future may be less relevant than it was in the past. "The lack of consumer response" observations, therefore, potentially be a case of a very different kind of response from the central bank's house price falls from typical past. (Haines, 2007, pp. 1635)

Housing Prices 44

Figure 2 shows that since 1970 the rapid growth in house prices (green line) that runs each fall in real prices was accompanied by a rapid increase in consumption (red line), and each time the home of United Kingdom inflation declined in real terms, so did rates (nominal) consumption growth. However, since mid-1990 when house price inflation has accelerated, the rate of consumption growth has, at least, slowed down, but it certainly does not attained growth in the late 1980's boom. One of the corners to explore in an attempt to explain this model relates to the recent rise in house prices as the increase in value of home warranties, and hence improves the access of owners under finance cost of insurance. If it is not so important today, one consequence will be less consumption response to an increase in housing prices. Recent evidence of this is provided durables spending behaviour. Actual expenditure is durable and semi durable highly pro-cyclical. However, since the real prices of durable and nondurable goods decreased significantly the growth rate of nominal spending is durable and semi durable goods was close to the rate of growth of "other goods and services from the end of 1990 (59% since 1998 Q1, not much higher than 5.4% in

Housing Prices 45 "other goods and services"). Accordingly, the ratio of durable nondurable was close to its assessment of long-term trends

But with this there is a surprising result when put next to the increase in housing prices. In the past, the ratio of durable expenditure as a share of total consumption is strongly correlated with housing prices, which had been completely destroyed since the end of 1990. This is not something we've come to expect. Durable goods are much more likely to buy on credit nondurable goods, such costs must be robust with respect to prices, house track, if the growth in house prices tend to create security and thereby reduce the loss of credit. So the gap may be due to credit constraints are now much weaker than in the past that the increase in housing wealth has little impact - through the value of the collateral - in the empowerment of consumption. Of course, many of the severe credit restrictions were removed in previous periods. Or it may be because common engine for house prices and consumption of durable goods - particularly optimistic about future income and wealth -

Housing Prices 46 since the late 1990's. Higher expectations of long-term earnings are expected to increase the desired stock of durables, and adjusting to this new level may cause a temporary increase in growth for durable goods and, therefore, the relationship between durable goods, nondurable operating costs while at the same time, as expectations of strong Income is also an increase in consumer demand for housing and, consequently, increases in housing prices (which in turn can be used as collateral to unlock households Limited credit and allow such a strong spending21). In contrast to data on consumption seems to be assuming that earnings expectations are stable enough, consumers expect moderate growth in wages, and even less, with no earned income in the past (for example, after the stock market shakecentury). (Green, 2007, pp. 91112)

4.2 Debt and Equity Withdrawal Low growth in consumption compared to previous episodes may seem strange, given the rapid growth of household debt in the UK. Mortgage debt, in particular, has increased by about 15% annually over the past five years, as well as mortgage equity withdrawal, MEW has gone from 0% of household income in late 1990 (at the end of the channel from 6 years old, which fell after the collapse of early 1990 ), more than 8% at present. However, in the same period, consumption as a percentage of household disposable income (the red line in Figure 9) has not changed at all. In Figure 9, the ratio of consumption to the MEW only after the last increase in prices of real estate market and the subsequent decline is remarkable. The suggestion is that recent trends mean that a similar

Housing Prices 47 correlation would not have happened if the MEW has collapsed after the numerous house price falls.

4.3 Mortgage Equity Withdrawal Mortgage equity withdrawal, MEW - defined as new borrowing for residential real estate more new investments in residential property - often at the center of this debate. Although the conclusion that Mew cannot be the most important part of history as a whole, perhaps, obliged us to take a closer look at the fundamental nature and role of MEW.

Some Longer-Run Data The figure shows that MEW was negligible in the United Kingdom until 1980, rarely exceeds 2% of income after taxes. Since the 1980 financial liberalisation has allowed families to more effectively manage their assets and liabilities and to strengthen links between housing prices, MEW fair housing, and, as indicated in Figure, consumption as well. In the period from the twenties MEW 1979-1999 average of 3% per year in the UK (an average of some very big changes), in contrast to many other countries, Germany, France and Italy was a pure injection of 6% of income on housing. No other EU country managed to get anywhere near 8% MEW. MEA has increased dramatically in recent years (the 2003 level of 40% above 2002 levels and 8.3% of disposable income, a record). Both UK and U.S. 12 (with MEW in 6% of disposable income) has been the peak of 1980s

Housing Prices 48

4.4 UK House Prices and GDP Growth Trends Analysis Although many methods were used to determine the future of the housing market prices, such as income, interest rates on mortgage rates, currency estimates, real inflationadjusted terms reviews, comparisons with other global markets, housing and real disposable income, this analysis aims to add real home in the UK market analysis on the growth of UK GDP. In this case, it is assumed that the assets required for long-term increase in line with the countries of real economic growth measured in gross domestic product.

4.5 UK GDP Growth Forecast December 2009 provides for the UK 2010-2015 GDP growth has recently been updated (UK Economy GDP growth forecast for 2010-2015) ended with a revised growth

Housing Prices 49 expectations for 2011, below the 2.3% to 1.3%. Projections for the years 2010, 2012, 2013 and 2014 remain unchanged, and this is shown below.

UK GDP 2010 = 2.8% UK GDP 2011 = 2.3% - Revised down to 1.3% UK GDP 2012 = 1.1% UK GDP 2013 = 1.4% UK GDP 2014 = 3.1% UK GDP mid 2015 = 3.3% - NEW

Housing Prices 50 4.6 UK House Prices Valuation against GDP Growth Trend Projection The following graph illustrates House Great Britain Great Britain against the trend in GDP growth (up to Q2 2010) with respect to the price index Halifax in June 2010 of 166K, which translates into a current reading of 37% revaluation. Trend GDP growth forecasts, as shown above in the application of the index that a decline of more than 10% of GDP. Note that this is not a trend forecast of housing prices in the UK, but where the rate of contributions, which are opposed to, contrary to expectations, for the British economy if house prices in Britain suspended the current level. Therefore, prices will go up or down the real rate is greater or less than indicated.

The chart above shows that the UK property market is very sentiment driven, and in many ways exhibits the same behavior as the stock moving between the extremes of assessment and evaluation for the UK 'S trend GDP growth. (Gould, 2005, pp. 411422)

Housing Prices 51 The current state of the UK housing market 37% with respect to the assessment of GDP, compared with the reading at more than 60%, so that it is still far from the bottom of the state associated with 0% and below. If, however, against this from year to year expected economic growth materialises, then even if house prices in Britain have not changed from current levels, the housing prices in the UK did trend toward state standards on the GDP, an estimated 10% of reading. This is consistent with my expectations of many years in the UK property market has entered a period of depression after the first accident. However, if the UK economy plunge into recession after GDP contracted demand in housing prices in the UK in the trend is much lower again as the UK economy performing stronger than expected, it will ensure the price rise homes in the UK, so it will be important for tracking the evolution of real GDP against GDP forecast the relative strength or weakness of guidance for future trends in property prices. GDP growth trend analysis indicates a continuing depression in the housing market in the UK over the next 3-4 years will likely be a gradual decrease in prices drift lower in the next 1-2 years (12,6%), followed by another 1-2 years for the construction of the base.

4.7 The Price of the House and its Involvement in the Economy One of the drivers of growth in the housing sector was the low interest rates. Financing costs are extremely low charge of boosting demand for housing which in turn fuelled the building of these. In the middle of the housing boom were real interest rates negative for several years. If we add an increase in population and housing needs for the baby boom generation can understand how it was the boom of the brick.

Housing Prices 52 If we analyse the elements through which the downturn in real estate is transferred to the rest of the economy we find that the fall in property prices reduce the wealth (asset value) and therefore the financing capacity of individuals and companies. The deflation of property prices has a direct relationship with the growth of GDP, credit and unemployment. In fact this fall in prices not only expected deceleration in economic activity but it is also the causal part of the process of slowing down. The construction sector is one of the more cyclical sectors with a multiplier effect on the larger economy and more extreme variations. During the expansion cycle grows above average and during the recession cycle also decreases more than the average. This is due in large part to the long lifetime of investments. While the construction of a house can be extended to about two years, the demand has repayment means a decade. This causes variations of rising interest rates reduce demand while developing promotions that catered to this demand and at completion produce an oversupply of housing in a market with lower demand and ultimately will have its impact on product price.

4.8 The Effect of Falling House Prices The fall in house prices has a direct effect on household wealth, as is where deposited 80% of this is. One way to offset the negative effect of this loss of wealth is by reducing consumption and increasing savings. The consumption is drastically reduced when it is financed by home warranty, a practice that has exploded in our country during this crisis to three credits per household (mortgage, personal loan and credit card). The price increases led to increase the level of household debt to a continued high appreciation of

Housing Prices 53 housing which encouraged consumption and that is what is known as false wealth or living beyond our means. The price of housing also affects businesses because it causes a fall in land prices and therefore any asset property such as offices, factories, hotels, etc. This devaluation of the assets of the companies causes deterioration in their balance expensive access to credit and reduces its ability to borrow. With respect to financial institutions the fall of house prices and spread of any real estate assets diminishes the value of mortgage guarantees loans below the value awarded and due to late payment has a direct impact on profitability. This in turn has a direct impact on its ability to finance new operations and thus reduce the supply of credit to the provisioning requirement. This in turn requires the agency to adopt a defensive position to new incidents which further reduces the supply of credit. The sum of the three officers involved, families, businesses and financial institutions generate a contractionary effect on economic activity must be stopped somewhere on the link to have no harmful consequences. The fall in consumption in turn affects a drop in production to meet demand and investment is reduced to the impossibility of profitable operations. All this just affecting the labour market for redundancies and not renewing contracts. The financial sector in turn hurt the face of rising delinquencies by the inability of unemployed workers with diminished income and companies to meet loan payments. The spiral is fed back and unemployment rises further fall in consumption, which again leads to higher unemployment, more delinquencies and returns to feed the decline in property prices.

Housing Prices 54 4.9 Characteristics of Housing Cycles In the past 40 years house prices in advanced countries has grown by an average of 2.6% per year and most of the time has been on an upswing. The expansive phase lasted an average of 6 years, during which the price of housing has risen by 62%.While recessions have been repeated regularly been two periods of deflation on average per country with a duration of five years each and a drop in house prices of 23%. Globalisation has led to a global synchronisation of the growth cycle of the advanced economies. During the last expansionary cycle in interest rates remained very low in these economies that fuelled economic activity and continued his extraordinary growth cycle with an average of 10 years and an average appreciation of housing by 100%. The intensity and duration of the last phase of expansion has a direct impact on the subsequent recessionary cycle. The greater is the expansionary phase of the longer postrecession, and the greater has been the reassessment of housing during the first period the greater the devaluation in the second but not obeys a linear relationship and therefore bears no proportionality. One of the elements that distort the results due to population increase that many countries have suffered in recent years has been the case in Spain and therefore has limited the decline in housing prices. Statistics show a direct and synchronised between the deflation of real estate and development sector of the economy with GDP decline, credit crunch and rising unemployment. After starting the deflation in real estate moves its effect in subsequent quarters of GDP and credit. Since the beginning of the fall in the price of housing up to a year and a half after the GDP and credit time decrease to bottom from which they recover

Housing Prices 55 slowly. With unemployment the same thing happens and does not begin to decrease until after 4 years. In indication to all banking crises have occurred during periods of falling housing prices. In these cases the collapse of housing prices has been extended another year and has fallen 10% more than in a normal crisis so that it can be concluded that the proper functioning of the financial sector minimises the effects of the price drop housing on the economy.

4.10 Interest Rates on Mortgages and Housing Prices To what form are the interest rates on mortgages? If the percentage rate of change throughout the contract period of the loan, but the specific system and specific rules, then they are called floating or variable. The variable rate is usually slightly lower than at the beginning of payments than fixed, but there is a risk that in future it will only increase. With mortgage lending by multiplying the duration of the loan at the bank rate, we get very small amounts of bank income. And sometimes the mortgage banking activities, even losing, but they continue to lend mortgages in the hope of some development and perspectives in this direction. (Glaeser, 2003, pp. 3782) Of course, if we compare with the past interest rates on mortgages for a few years gradually declined significantly. But housing prices are not standing still. Also, in recent years property prices have made an enormous leap upwards. Today, interest rates on mortgages will go down gradually and smoothly, although the price of housing probably will not go down. According to analysts of the mortgage market does not make sense to wait until

Housing Prices 56 mortgage interest will be minimal. You can even stay at a loss if home prices and will continue to grow. Is it important today mortgage? This is a credit for the purchase of mortgages. The borrower receives funds for home purchase, and it also provides as collateral (guarantee) its own solvency. Purchased a mortgage scheme property become the property of the buyer. Since some of the costs of housing have to be paid by the buyer, that made an initial contribution. Of course, banks can issue mortgage loans with no down payment, increasing interest rates on mortgages, but the increased risk of no one cancels. The law "On mortgage" adjusts the legality and regularity of transactions in mortgage lending. Credit terms, the requirements for the borrower, the interest rates on mortgages, common mortgage terms are different for different banks, and constantly changing. Changing customer requirements, development of new mortgage programs, interest rates fluctuate. To explore all the features of home purchase loans, you should carefully consider the proposals of several banks to save more than one thousand $ and choose the best and most advantageous proposal among many. For example, there is a property tax deduction, reducing the purchase of housing mortgage interest. Recipient of a mortgage loan should not pay income tax on the amount it spends on the first home purchase and the amount of interest on the mortgage. Often, banks offer special programs for social and subsidised mortgages, mortgages for families of military personnel as well as the program with reduced rates for young families. Today, for many families mortgage is the only chance to buy their own apartment. Especially since the state began to support mortgage lending, and soon the mortgage interest will only go down.

Housing Prices 57 4.11 The Credit Crunch and Property Investment The credit market turmoil in 2007 hit the property investment market which was already experiencing some reduction in liquidity and a peak in capital growth. The effect of the sharp dislocation in debt markets was to accelerate a sharp adjustment in both activity levels and re-pricing in the property investment market, with a large and sudden shift in investor sentiment against the sector. The credit crunch has reduced the availability of debt for property investment and made its cost more closely related to risk. Issuance in the commercial mortgage-backed securities (CMBS) market sharply reduced, removing a relatively low cost route to borrowing. Highly leveraged investment activity has been sharply curtailed. The CMBS market has been a less important source of finance for property investment in the UK compared to the US, although syndication of large loans has been significant and has now become much more difficult. A clear consequence is that the availability of debt for very large transactions, such as those involving big Central London offices, is greatly reduced. Across the market generally, lending conditions have tightened and loan to value ratios have reduced. Fewer banks wish to expand their property loan books and in general banks have become more selective with respect to borrowers they will support. To an extent, bank lending to the sector has re-focused on established relationships. The stock of bank loans outstanding to UK real estate has more than doubled over the past five years, reaching 193 billion at the end of 2007 on the Bank of Englands figures. This underestimates total lending to the property sector as it excludes loans from certain categories of lenders, including German mortgage banks and building societies. Bank lending policies will clearly be crucial to market liquidity going forward. Merrill

Housing Prices 58 Lynch has estimated that around 60 billion of property loans require repayment or refinancing by the end of 2009. Any adverse shift in bank policies which lead to re-financing problems in relation to this level of debt will have serious market implications.

4.12 The Credit Crunch and Property Development The credit crunch and its consequences have significantly changed the climate for property development in the UK. It is important here to distinguish between developments which are already in progress and will complete over the next year or two and those not yet started that were planned for implementation in the short term. The credit crunch will not greatly affect the amount of new development that will be completed in the next two years or so, which principally comprises schemes already under construction, but could have a significant effect on the amount of new construction that is initiated over this time period and hence strongly affect medium-term completion levels. The credit crunch is a potentially significant influence on development activity directly and indirectly: Tighter credit conditions are impacting the availability and cost of finance for development. This not only includes debt, but also the readiness of institutional investors to commit resources to new development schemes in present market conditions and greater risk sensitivity. The assumptions used in appraising potential developments in financial terms will be changed in light of the credit crunch and its wider impacts. Rental projections will be more cautious in the context of greater uncertainties over the strength of occupational demand, as will the assumptions about voids before letting and the extent of rent free

Housing Prices 59 periods that will be needed. At the same time, assumptions about the end value of completed developments will need to reflect the upward movement in investment yields. These impacts will also have a negative effect on development land values. (Gaspar, 1998, pp. 136156) Property developers are also facing the prospect of significant construction cost inflation as a number of large projects converge. Shortages of key skills and specialist contractors are emerging as key potential constraints on new development. In this context, developments which have not started will become subject to increased scrutiny with revised development appraisals and potential reconsideration as to design, timing or whether a scheme should proceed on a speculative basis or be made contingent upon securing a substantial pre-letting commitment. In this environment, developers will look further afield for sources of finance for development schemes, with overseas funding likely to be pursued in more cases. As an example, the Shard of Glass development at London Bridge is now set to proceed with financing arranged with Qatari partners. The net effect of the credit crunch on development activity is likely to be that the initiation of new schemes in the short term will be substantially less than was envisaged 12 months ago. The London office market has a large pipeline of proposed schemes for completion in 2010 and beyond. The timing of a number of these has now become more uncertain. 4.13 Economic Instability and Macroeconomic Policy Macroeconomic instability and the economic cycle, as generally understood as changes in output and gross domestic product (GDP), unemployment and inflation. Economics long-term growth story is subject to short-term macroeconomic demand and

Housing Prices 60 supply shocks that drive GDP from long-term potential or trend rate of growth. Smith and the classical tradition continued to believe that hands-off approach was the correct political stabilisation to follow when such short-term violations of the production occurred. This reflects the traditional focus on long-term growth as a process of proposal, which was best left to private business. In addition, the private market economies automatically self-correct through appropriate wage and price adjustment. Deflation continues until the economy is back at full capacity. Until the twentieth century, the dependence of the classical school of self-correction of private markets, the gold standard of the product, and promotion of free trade in a broad sense of macroeconomics. Fiscal policy is seen as a means by which the government provides essential public goods and services deficit spending is due to war or weakness in the economy, which reduced state revenues from taxes. Monetary policy of the United States, working without a central bank until 1914, it was not considered a tool of macroeconomic stabilisation. Financial difficulties before and during the Great Depression were to change this situation.

Housing Prices 61

CHAPTER 5: CONCLUSION

This work has focused on micro-and macroeconomic factors, which are devoted to housing. In a world in which new public spending cuts will likely be the norm, it should be done more carefully than in the past. Home should be considered in light of the limitations of other resources in the economy. If the claims of any housing is higher than health or education, such as econometric models, although far from perfect representation of the economy, could become a useful tool for analysing some of the interactions between housing and the economy. Three conclusions can be drawn from the experiments. The growth of housing costs often lead to short-term GDP growth and employment, especially when the economy is not working at full employment, these benefits can last for several years. But when the economy is close to full capacity, increased demand from the government in inflation mainly reflected in the workplace. It speaks about the role for counter-cyclical government policies. Although the British government as a whole is controlled by this policy in 1980, there were attempts to act counter-cyclical in the housing market in early 1990. The measures were part of "discretionary" -. "Automatically" relaxation of rules on access to capital for the year 1993, for example, in the part of automatic stabilisers arose from the weakness of the bid prices during a recession, which means that spending limits set out in monetary terms to the increase in real production. The emphasis on supply-side economics has been shown that an increase in public expenditure, by themselves, there is little long-term effect on overall production and employment. UK policy of macro-economic indicators in 1980 was aimed at structural changes to improve

Housing Prices 62 the productivity rate. The simulation results show that the housing market, through its effects on the labor market affects the rate of growth over time. Reforming the financial system within a decade the 1980s were originally conceived as a means to improve growth by eliminating the constraints under which the economy works. In fact, improved nutrition has been swamped with the impact on aggregate demand from consumers? The researcher called for a reorientation of research on the relationship between housing supply and the economy. Much of the work so far has been related to the effects of housing on aggregate demand. Although the relationship between housing markets and the work was studied to some extent, it hardly scratches the surface of potential interactions. As mentioned in the second section, in principle, the home can affect the production potential itself. Although no empirical (or theoretical) data on the most important mechanisms of transmission, we can mention the following: the relationship between housing, health and education. At a place where each and every industry is globally mobilised, there are certain factors like infrastructure, environment quality and housing, that can play a vital role to attract industries. Though, this can be known that such factors also impacts poverty traps and still a little proof of it on labor supply can suggest you that unambiguous special dimension must be added to the analysis of whether the house is composed of interconnected series of local and regional markets rather than national markets.

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