Credit crunch and UK housing market

Question 0

Why are housing prices inelastic?

Answer 0

As supply is fixed - takes long to build a house

Question 1

What is the % of owner occupied housing in the UK?

Answer 1

70%

Question 2

Define REAL house prices:

Answer 2

Accounts for inflation

Question 3

Define NOMINAL house prices:

Answer 3

The ‘actual’ price

Question 4

Average house price?

Answer 4

£17,500

Question 5

Equation for REAL house price index:

Answer 5

Real house price index =

 Nominal house price index X 100
 ➖➖➖➖➖➖➖➖➖
  Retail price index

Question 6

Six factors that may cause a change in demand :

Answer 6

Price of substitutes 
Price of compliments 
Disposable income 
Employment/unemployment prospects
Demographic factors 
Speculation

Question 7

Impact on housing if there is a rise in disposable income?

Answer 7

Shows the economy is booming (people are getting richer) therefore an increase in demand for housing

Question 8

Define mortgage rate:

Answer 8

The price of borrowing money that is used to buy a house

Question 9

Why are individuals often given up to three times or five times there salary (mortgage rate)

Answer 9

So they can afford mortgage repayments amongst other things

Question 10

When interest (mortgage) rates fall/ are low…

Answer 10

The cost of servicing the mortgage falls

Rise in demand for housing

Question 11

Mortgages are seen as

Answer 11

Complimentary goods

Question 12

LIBOR stands for

Answer 12

London interbank borrowing rate

Question 13

Define LIBO rate

Answer 13

The rate at which financial institutions use to lend to each other

Question 14

Sub-prime mortgages

Answer 14

As interest rates were low; when the banks started targeting ‘high risk’ borrowers (more likely to default -cannot afford the houses bought) i.e NINJAS

Question 15

Why did banks lend to high risk borrowers?

Answer 15

Banks did not screen properly (there was asymmetric information) - as balms wanted to grow and gain profit
Also it was at the interest of the employee as some got commission for their sales

Question 16

Define commission:

Answer 16

Wages based on sales

Question 17

What is the problem to schemes like “Help to buy”

Answer 17

Causing a boost in demand for housing (fuelling another boom) however supply is not increasing

Question 18

If the price to earnings ratio gets too high….

Answer 18

People will stop buying houses…

Question 19

When the base rate rises…

Answer 19

The interest rate also rises too (the interest rate changes with the BOE base rate)

Question 20

After 9/11 in the US in order to restore confidence in the econ…

Answer 20

The gov. cut interest rates and there was a housing boom - people started buying houses

Question 21

If mortgage is cheap… What does this do monthly repayments?

Answer 21

Monthly repayments are low and most likely to buy a house

Question 22

If interest rates rise what does this mean for demand for housing

Answer 22

Mortgages will be expensive and your less likely to buy a house