Credit crunch and UK housing market Flashcards
Why are housing prices inelastic?
As supply is fixed - takes long to build a house
What is the % of owner occupied housing in the UK?
70%
Define REAL house prices:
Accounts for inflation
Define NOMINAL house prices:
The ‘actual’ price
Average house price?
£17,500
Equation for REAL house price index:
Real house price index =
Nominal house price index X 100 ➖➖➖➖➖➖➖➖➖ Retail price index
Six factors that may cause a change in demand :
Price of substitutes Price of compliments Disposable income Employment/unemployment prospects Demographic factors Speculation
Impact on housing if there is a rise in disposable income?
Shows the economy is booming (people are getting richer) therefore an increase in demand for housing
Define mortgage rate:
The price of borrowing money that is used to buy a house
Why are individuals often given up to three times or five times there salary (mortgage rate)
So they can afford mortgage repayments amongst other things
When interest (mortgage) rates fall/ are low…
The cost of servicing the mortgage falls
Rise in demand for housing
Mortgages are seen as
Complimentary goods
LIBOR stands for
London interbank borrowing rate
Define LIBO rate
The rate at which financial institutions use to lend to each other
Sub-prime mortgages
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
Why did banks lend to high risk borrowers?
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
Define commission:
Wages based on sales
What is the problem to schemes like “Help to buy”
Causing a boost in demand for housing (fuelling another boom) however supply is not increasing
If the price to earnings ratio gets too high….
People will stop buying houses…
When the base rate rises…
The interest rate also rises too (the interest rate changes with the BOE base rate)
After 9/11 in the US in order to restore confidence in the econ…
The gov. cut interest rates and there was a housing boom - people started buying houses
If mortgage is cheap… What does this do monthly repayments?
Monthly repayments are low and most likely to buy a house
If interest rates rise what does this mean for demand for housing
Mortgages will be expensive and your less likely to buy a house
