Oxford House Prices

Oxford, as a university town, has witnessed remarkable increases in house prices in recent years. House prices have risen above the national average to nearly £291,111 source

House price inflation in Oxford was 12% in the previous 12 months, this is close to the national average.

Reasons for rapid house price increases in Oxford include:

• Parents of Students Buying House for saving rent and capital gains.
• Limited land to build houses within Oxford ring road.
• Close proximity to London - 1 hour by train, good coach service to London.
• Booming local economy, with very low levels of unemployment

London House Prices Rise 32% in 2006

London

According to estate agent Knight Frank, London House prices, in certain areas like Mayfair, rose by a record 32% last year. A significant reason for this, continued London House price boom, is the generous bonuses given to city workers. Another reason is the inflow of money from abroad; foreign investors are buying houses in London. In particular demand is rising from Russian and Arab investors. It is not just the likes of Roman Ambrovavich who have countless millions to spend.

Despite the rising demand, supply is still limited. Houses are being sold very quickly after being put on the market. There has been an increase in gazumping and sealed bid - features not seen since the late 1980s boom.

The effect of these 2 groups is that house prices are rising, even though many houses in London are beyond the reach of ordinary workers, such as nurses and teachers.

The average price of a house in London is now £322,108

House prices in the rest of the country continue to boom.

(1) House Prices London

Elasticity and the UK Housing Market.

Elasticity measures the responsiveness of demand and supply to changes in price and incomes.

Price Elasticity of Demand.

PED measures the % change in demand in response to a % change in price. In the housing market, demand for housing is often inelastic. This is because there are few substitutes to buying a house; home buyers see buying a house as a necessity. Therefore as prices rise people are willing to spend a higher % of their income on the house. This has been helped by greater generosity from mortgage lenders: it is now easier to get a bigger mortgage multiple than before. E.g. in the past 15 years, UK house prices have risen by nearly 200%, but demand has continued to grow. This suggests demand for housing is very inelastic.

However for some people on low income their demand may be more elastic; this is because as house prices rise they can no longer afford to buy.

Income Elasticity of Demand.

YED measures the % change in demand in response to a % change in income. In the UK rising incomes have led to a bigger % of income spent on housing. This suggests demand is income elastic for housing. Demand is elastic because as income rises, people place great emphasis on buying a bigger and more attractive house. For example people are willing to spend alot on a new house near a good state school; this is because buying a house in the right location can save the necessity of sending a child to a private school. Some people even buy a second house when there income increases. In the past 15 years the ratio of house prices to incomes has increased significantly.

Prices Elasticity of Supply

PES measures the % changes in supply in response to a % in price. In the short term supply is very inelastic; this is because it takes along time to get planning permission and build a house. In the long term the elasticity of supply depends on geographical location. For example, in London it is very difficult to find space to build more houses, therefore supply is very inelastic. In other parts of the country it is easier to get planning permission and find space to build new houses.

AVerage UK House Prices over £100,000 in every town

Research by Halifax Britain's biggest mortgage lender shows that even the cheapest town in the UK, Lochgelly, has an average house price of over £100,000.

In another study it is suggested that 99% of all towns are too expensive for a nurse to buy a house in.

Lochgelly in Scotland used to be a mining town, but suffered economically when the mines closed down. However in recent years it has been a target for regeneration and this has had a knock on effect for house prices.

The average UK house price is now over £160,000. House Price inflation continues to exceed market expectations. There are concerns that first time buyers are being priced out of the market. However despite this occurring it is not limiting house price increases because of the shortage of supply relative to demand.

UK House Prices

House prices by postcode

average house prices pass £100,000

The news will add to growing concerns that thousands of key workers and first-time buyers are being priced out of the market. A recent report showed 99 per cent of towns are unaffordable for a nurse on a typical salary.

The report revealed another milestone. For the first time, the 10 towns that have seen the biggest house price rises during the last 12 months are all in the same area - Northern Ireland. Craigavon in County Armagh and Newtownards in County Down are the UK's property hotspots, both clocking up a 55 per cent rise in prices in the past year.

House Price Collapse in UK? is it likely

With interest rates set to increase in the near future some commentators argue this could be the signal for house prices in the UK to collapse either at the end of 2007 or in 2008.


In the US house prices have been falling significantly. The reasons for the fall in US house prices can be seen here: Fall in US house prices.

However there are various reasons why the UK Housing Market is different to the US housing market.

Why House Prices are unlikely to Collapse

1. Differences in Sub Prime Market.

The US sub prime market was more aggressive in its sale of "bad credit mortgages". Although the UK mortgage lenders have become less stringent they still retain more safeguards in checking a mortgage plan is payable.

2. Shortage of Supply in UK. Excess supply in US.

In the UK there is still a fundamental underlying shortage of housing. In the US there is a growing surplus of housing. The excess supply of housing is a consequence of the irrational exuberance generated in the housing boom of 2002-2005. There is an increase in the number of houses without owners.

3. Differences in Interest Rates.

US interest rates have increased from a low of 1% in 2003 to their current rates of 3.5% This has had a significant impact on increasing cost of mortgages. In the UK the increase in interest rates has been a smaller and more gradual process in last year UK interest rates have only increased by 0.75%

4. Population growth.

The UK is witnessing an increase in the number of households. This is caused by:

Immigration from Eastern Europe
Demographic Factors such as rising number of single people.
Aging population, increasing number of old people living alone.

Combined with a shortage of supply this explains a significant reason for increase in UK house prices.

Why Houses Will Fall

• Why House Prices may Fall

• When Will Property Prices Fall?

• Why House Prices may Keep Rising

• House Price Crash - views on UK housing market

How house prices can affect the Whole Economy.

House Prices have a significant impact on the National Economy

• House prices are the biggest component of household wealth.
• The number of homeowners in the UK has increased with a bigger % of people buying their house rather than renting.
  
• This trend has been helped by the sale of council houses in the 1980s.
  
• It was Mrs Thatcher’s desire to transform the UK into a property owning democracy. To a large extent this has been done. (78% houses are owned)

Rising house prices increase consumer wealth and are likely to be associated with an increase in mortgage equity withdrawal.
means people remortgage and take out a bigger loan against the value of their house. It means they have more money that they can spend and this leads to an increase in consumer spending and therefore Aggregate demand.

Rising house prices can also increase consumer confidence. It encourages people to take out other borrowings as they know that they can always release equity from the value of their house if necessary.

Therefore rising house prices can be instrumental in raising consumer spending and economic growth. Rising house prices can also be inflationary. This will occur if increasing house prices cause economic growth to be unsustainable. For example in the late 1980s rising house prices were a key factor in causing the inflationary Lawson boom of 1989. However rising house prices do not always cause inflation. If other components of economic growth are increasing at a slow rate, house prices may not cause inflation. For example between 2001-2007 house prices in the UK have been rising far quicker than the rate of inflation (which has remained in governments target of 1-3%)

Effect of Falling House Prices

Falling house prices usually have a more powerful effect than rising house prices.

People are used to rising house prices and the majority of homeowners don’t actually release the increased equity through remortgaging. However when house prices fall it can trigger a large fall in consumer confidence. People view falling house prices as a serious problem and in the past has been associated with reductions in consumer spending as people become much more risk averse.

For those who have recently remortgaged or bought a house falling house prices can lead to negative equity. Negative equity means the value of the house is less than the outstanding mortgage debt. This is a real problem for those who are struggling to meet mortgage repayments; there is no option to switch mortgage deals and reduce monthly payments.

Again the effect of falling house prices depends upon other variables in the economy.

For example falling house prices in 1991 was associated with a period of very high interest rates. Therefore homeowners were faced with a twin problem of high mortgage costs and falling house prices. If house prices fell in the UK in 2007 or 2008 real interest rates would likely be much lower. Furthermore the MPC would be likely to cut interest rates as falling house prices reduced inflationary pressures.

See also How House Prices affect economic growth and inflation in UK

See also Role of House Prices in determining Monetary policy