Reasons Why Housing Prices Have Fallen in the UK Since July 2008 Term Paper

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Introduction

The housing market in the UK, since July 2008 has been weakening and the trend is still continuing. As the market weakens, house prices keep on declining and according to the UK housing report (2008), the bottom is yet to be reached. This fall in house prices may be attributed to the following events:

The rate of inflation of house prices has gone low

The house price inflation, per annum, in the UK, has stagnated since the beginning of 2008. Surveys conducted in the UK indicate that house prices have gone down since May 2008 as compared to earlier years. This is because inflation greatly exaggerates the price of commodities and when there is no inflation and other factors, such as demand, put into consideration the prices of the houses go down or stay stagnated (OECD Economic Survey: UK 2005).

The decline in mortgage approvals

The numbers of applications for mortgages for house buying that have been approved by the financing institutions have sharply declined to lead to a drop in house sales by 47% of the previous year. This has resulted from the household being unable to service their debts and therefore the financial service provides are reluctant to give mortgages (OECD Economic Survey: UK 2005).

Affordability

According to the UK housing report (2008), most households have borrowed about three times their yearly incomes The amount of borrowing as compared to earning, therefore, remains high. This has led to difficulties in mortgage repayment as households continue to be stretched to meet their other needs. The prices of other goods, such as fuel, have also escalated adding a financial burden to the households Mortgage companies have therefore required the borrowers to sign up for mortgages relative to their incomes. This has greatly lowered the affordability power of the people.

Servicing of debt

Since early 2008 debt repayment has dropped as more people continue to allocate very low percentages of their incomes to debt repayment. This has been a result of the ever-rising prices of other household goods. This makes the mortgagers be more stringent in their lending hence fewer people get the financing to buy homes. Low demand leads to low house prices (OECD Economic Survey: UK 2005).

The performance of the economy

From the study carried out in the UK Housing Report (2008), the price per house declined by about 3.3% between May and June. The UK’s strong economic performance in the year 2007 led to a commendable performance of its housing market. With the global recession persisting and the performance of financial services deteriorating, housing prices have also gone down as fewer households are able to afford mortgages.

Summary

With a decline in the performance of the UK economy due to the world recession, the continuing low affordability of housing, low activity in the housing finance activities, and the sharp slowing down of house price inflation has greatly affected the falling down of house prices in the UK. These factors continue to affect the housing market and prices are expected to dip yet a little further.

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