Impact of Credit Crunch on UK Housing Market

A Study of
THE IMPACT OF THE CREDIT CRUNCH ON UK HOUSING MARKET
Submitted to:
University of Gloucestershire
In partial fulfilment of Master of Business Administration (MBA)
In Finance
October 2011
Submitted by
Binod Kumar Chongbang
Student ID: B0447RHRH1110
UoG Student Number: s1015941
School of Business and Law (UoG)

Acknowledgement
First of all, my immense gratitude goes to the University of Gloucestershire providing me this
opportunity to do research in this topic on behalf of partial fulfilment of Master of Business
Administration.
I would like to thank my supervisor, Ernest Kapaya for providing me such effective guidance
being friendly and supportive all the time, without his guidelines it would not be possible to
accomplish this research along with all my professors and lecturers.
I can’t stand back without thanking to the City Business library, London and British Library
staff for being helpful during my research.
I am thankful to my family for providing me support all the time and believing in me which
led me to come so far for further study in Britain.
I would like to thank Mr. Sebak Pandey, Ms Qiu Rong Chen and Mr Sanjeep Dhital for their
kind help and effort to make my research successful. I am also thankful to Mr Sashil Chhetri
and Mr Nishan Sharma for their support and help to accomplish my tasks.
My special gratitude goes to Ms Anita Limbu for being always supportive.

Abstract
This dissertation is primarily focused in to the housing prices of UK housing market and the
lending situation during the financial turmoil. Giving more emphasize in the housing prices,
this dissertation thoroughly examines the housing boom and bust of the UK housing market
keeping into mind that the how much credit crisis affected in to it. It also attempts to
understand the volatility of UK housing market along with the credit availability in the
market. Due to the volatile market, there is always fluctuations occur in UK housing market.
In contrary, this research tried to analysis the housing prices trend along with the type of
mortgages which are available in the market. The research has been gone through to
understand whether there is house prices overvalued or not. There are several factors that
affects the house prices from demand and supply sides, research tried to outline those factors
and their impact on house prices. Due to inadequate supply of houses in order to satisfy the
housing demand, there was housing boom. Eventually, lending excessively mortgages loan
invited massive financial turmoil. Despite of downturn in housing market, in recent years the
market is moving slowly to upward.

Table of Contents
Chapter-1....................................................................................................................................1
INTRODUCTION .....................................................................................................................1
1. Background of the Study....................................................................................................1
1.1.0 Credit Crunch an overview ..................................................................................1
1.1.1 Real Estate at Glance .................................................................................................2
1.2 Statement of the problem .................................................................................................3
1.3 Objectives of the study.....................................................................................................4
1.4 Research Questions ..........................................................................................................4
1.5 Purpose of the study.........................................................................................................5
1.6 Organisation of Study.......................................................................................................5
Chapter 2....................................................................................................................................8
Literature Review.......................................................................................................................8
2.0 Introduction......................................................................................................................8
2.1. UK Housing Market, Nature and Trends (Pre-Dominance of Home Ownership)..........9
2.2 Housing Bubble..............................................................................................................11
2.3 Housing Price Measurement ..........................................................................................13
2.3.1 Demand and Supply Theory of UK Housing Market..............................................14
2.4 Factors Affecting House Prices......................................................................................18
2.4.1 Factors from Demand Side ......................................................................................18
2.4.2. Supply Side Factors ................................................................................................27
2.5 Volatility of the UK Housing Market ............................................................................29
2.5.1 National Picture .......................................................................................................29
2.5.2 Regional and local deviations in the Housing Market.............................................30
2.5.3. Housing Market and the Residential Mobility........................................................31
2.6 UK Mortgage Lending ...................................................................................................32
2.7 Summary ........................................................................................................................36
Chapter 3..................................................................................................................................37
Research Methodology ............................................................................................................37
3.1 Introduction....................................................................................................................37
3.2 Research Strategy...........................................................................................................37
3.3 Research Philosophy......................................................................................................38
3.3.1 Positivism ................................................................................................................38

3.3.2 Interpretivism...........................................................................................................38
3.4 Justification of Topic......................................................................................................39
3.5 Research Design.............................................................................................................39
3.6 Data Collection and Methods.........................................................................................40
3.6.1 Primary Data............................................................................................................40
3.6.2 Secondary Data........................................................................................................40
3.7 Case Study......................................................................................................................41
3.8 Data Analysis .................................................................................................................41
3.9 Limitation of the Study ..................................................................................................42
Chapter 4..................................................................................................................................43
Data Analysis ...........................................................................................................................43
4.1. Introduction...................................................................................................................43
4.2 UK Housing market before the Credit Crunch...............................................................43
4.2.1 Housing Prices of UK Housing Market before the Credit Crunch..........................43
4.2.2 Lending to Individuals before Crisis .......................................................................45
4.3 UK Housing Market since Credit Crunch......................................................................47
4.3.1 UK House Prices after Crisis...................................................................................47
4.3.2 Credit availability after crisis...................................................................................51
4.4 Over Valuation of House Prices in UK housing market ................................................52
4.5 Gross Mortgage Lending of UK.....................................................................................53
4.6 Trend Analysis of UK house prices ...............................................................................55
4.7 De-trend Analysis of UK house prices...........................................................................56
4.8 Future of UK House Prices ............................................................................................57
4.9 Summary ........................................................................................................................58
Chapter 5..................................................................................................................................59
Summary and Conclusion........................................................................................................59
5.1 Summary ........................................................................................................................59
5.2 Conclusion......................................................................................................................60
Chapter 6..................................................................................................................................62
Recommendations....................................................................................................................62
Chapter 7..................................................................................................................................63
Reflection.................................................................................................................................63
References................................................................................................................................65

List of Figures
Figure 1: Distribution of Dwellings by tenure-England and Wales, 2001-2008 10
Figure 2: UK house prices, Percentage change year on year 13
Figure 3: Demand for housing 15
Figure 4: Changes in Demand 15
Figure 5: Supply of Housing 16
Figure 6: Shifts in Supply 17
Figure 7: Demand and Supply graph: Supply Deficiency 17
Figure 8: Correlation between GDP and House Prices 19
Figure 9: Consumer Confidence and Consumption 21
Figure 10: Divorce Rates, England and Wales -2009 22
Figure 11: Number of Divorces by Age in England and Wales, 2009 23
Figure 12: Marriages, UK- 2009 24
Figure 13: Long-term international migration, UK (2000-2010) 25
Figure 14: Employment and Unemployment rate of England, 1971-2010 26
Figure 15: Dwelling completed in UK, 1949-2005 28
Figure 16: Annual Net Dwellings 2000/01-2009/10, England 28
Figure 17: Types of the Mortgages in UK, 2003 34
Figure 18: Nationwide Average House Prices of UK, 2000-2007 44
Figure 19: Halifax Average House Prices of UK, 2000-2007 44
Figure 20: Annual percentage change in UK house prices, 2000-2007 45
Figure 21: Lending to Individuals, 2000-2007 46
Figure 22: Nationwide House Prices, 2007-2010 48
Figure 23: Halifax House Prices, 2007-2010 49
Figure 24: Average House Prices of UK, 2000-2010 49

Figure 25: Halifax Percentage Change in Monthly House Prices, 2008-2010 50
Figure 26: Nationwide Percentage Change in Monthly House Prices, 2008-2010 50
Figure 27: Annual Change in Percentage of Average House Prices of UK, 2007-10 51
Figure 28: Net Lending to Individuals, 2008-2011 52
Figure 29: UK House Price Earnings Ratio, 1980-2010 53
Figure 30: UK Gross Mortgage Lending, 2002-2008 54
Figure 31: Gross Mortgage Lending, UK, Aug-2010 to Aug-2011 54
Figure 32: Trend of House Prices of UK, 2000-2010 56
Figure 33: De- Trend of House Prices of UK, 2000-2010 57

List of Tables
Table 1: Distribution of Dwellings by Tenure- England and Wales, 2001-2008 10
Table 2: UK Interest Rates, 1990-2009 20
Table 3: Total Lending to Individuals, 2000-2007 46
Table 4: Average House Prices Comparison 48
Table 5: Trend and De- Trend of UK House Prices, 2000-2010 55
Table 6: Future of UK House Prices 57

1
Chapter-1
INTRODUCTION
1. Background of the Study
This chapter has been categorised into different headings to make the whole picture more
clear and understandable. The background of the study also has been segregated into two sub-
heading to produce reliable outcomes regarding the topic. It is also aimed to make clear that
how much credit crunch and the housing market are related each other in terms of several
extent.
1.1.0 Credit Crunch an overview
The world economy is massively hit by a form of financial crisis as credit crunch in autumn
of 2007 which leaded a condition of financial instability in the world’s economy mostly to
USA, UK and European countries. Economists and researchers depict that the main cause of
the credit crunch goes to excessive lending by US banks on sub-prime loans for the property
market especially to the housing market. The residential property market reached at such
point which created a situation of disturbance to financial markets to obstruct the market’s
aptitude to allocate capital. The real estate market of UK was the most boomed in that
particular period. The credit crunch is a consequence of turn down in the supply of credit
which becomes unusually large for a stated or given phase or stage of the business cycle,
(Bernanke and Lown, 1991). When the dot com stock market crashed on 2000 and leaded to
the global financial crisis on 2001 that is the main trigger for credit crunch even though the
US sub-primes market is regarded the main cause. Credit crunch emerged after the Northern
Rock Bank in USA turned to bankruptcy due to providing excessive sub-prime loan for the
property market.
Credit crunch brought changes to the economy with itself like downturn in employment,
imbalance of financial market with severe financial trauma along with economic turmoil and
a situation where a loan supply has plunged more rapidly than loan demand. This situation
has originated from the property market. Housing market was growing and then the prices of

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property were going high day by day. Many banks had seen there is better opportunity to
invest providing sub-prime loans to the people. At the end, those people who took the
mortgage loan or sub-prime loan could not pay back to banks. Banks became bankrupt.
Credit crunch officially announced on 9th of August 2007.
1.1.1 Real Estate at Glance
Real estate is itself ‘land’ and ‘the property’ which is above that land. It can be categorised
into two types and that is commercial property and residential property. Basically the buying
and selling of houses and property for commercial purpose is called commercial property or
real estate. Those properties which are in process of buying and selling for the purpose of
residence are residential property. It can be an existing business building or empty land for
business/ commercial use. Whenever we talk about property and property market, vacant
land always takes place in to it because it is integral part of real estate. Vacant land can be
used either for commercial purpose or residence. Vacant land is that which has free space and
not used for any purpose before.
The property market history goes back to 1066 and that before. The period which is called as
‘All good comes from England’; that is actual drift of constructing a realm, which is suitable
to say that the beginning of real estate. After that organised housing market and fee simple
ownership came up in England, which is generally called two things from England in real
estate history. At that period to own the real estate was not as easy as like we do in recent
years. There were no such things like money to buy such lands and areas. There was not
monetary price for real estate. After the year 1066, William decreed himself as king of the
England and the all areas or property within England is regard to him and all people who are
inside England should be remain as his tenants. This created to emerge the Feudal system on
real estate. He used a device as a body called tenant-in-chief from the people side to make
that happen for validity of feudal system and administer the land through the tenure. Even
though the early start of real estate and the movement has been made throughout the England
the first transaction was made after the first real estate board was set up in 1888 at
Vancouver, Canada. The transaction worth was US dollar 600 for commercial lot which is
situated near Vancouver hotel. The operation of real estate industry was active till the First
World War but it was suspended till the year 1919. Since the real estate is come to operation
through resume process, it has been in operation ever since (Frascati, 2005).

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Property market is always huge financial market around the globe in recent days. Several up
and down has been already emerged like property bubble and crisis. The credit crunch is an
example of housing bubble between early 2000 to mid. The term bubble is widely used in
real estate industry which simply means about to burst. We do get very clear picture through
the term bubble that is new to market but gives symptoms of financial crisis in near future.
History clearly states that the financial crisis always do occur due to rapid change in prices of
real estate, that should be increase in prices. Japan and Germany were already hit by crisis
due to the same reason. It is very clearly known that how property market is volatile in terms
of finance and economy (Frascati, 2005). Due to its market volatility especially in UK, the
house prices were gone up and the crunch hit most severely. Even though the sub-prime loan
was started in US but the Credit crunch hit most severely to the UK housing market.
1.2 Statement of the problem
After the massive hit of credit crunch around the world mainly to Europe and America, the
financial market has been suffered by economic chaos. Due to the price bubble in housing
market of USA and UK lead to the crisis. As it is known, UK has the utter volume of increase
in price of housing property in the mid of the 2000 as bubble. Banks were providing
mortgage lending massively to the people and the market was continuously bubbling. It
reached to the boom line. Investors for the property market i.e. banks were thinking that the
property market is going up so they made investment on property market massively.
The financial markets are highly on to turmoil in investment market. Over the year of 2008,
globally 7 trillion US dollar has been wiped off to the stock market due to the credit crunch.
Fall in the value of shares in London exchange is most heightened among the banking and
real estate sectors. That was the situation of sharper than expected downturn in UK property
market. The depression in residential and commercial property market created complex
situation where is limited credit available and constricted lending criteria. Due to this
situation, there was substantial fall in development and transaction activities in UK.
This research is looking into the housing prices of UK under pre-crisis and post-crisis. There
was downturn in UK housing market due to the excessive mortgage lending, so, basically this
study will focus on the mortgage lending structure of UK. It is clearly experienced into the
financial market that there were several fluctuations which created limited credit into the

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financial market. So, it is obvious that the UK housing market is very much volatile. This
dissertation is also going to address the volatility of UK housing property.
After the careful study and analysis, this research will try to address the impact of credit
crunch on UK housing market with key findings through the conclusion and recommendation
of this research in possible extent.
1.3 Objectives of the study
This research is basically focused within housing prices of UK with boom and bust, the
housing market volatility of UK and the mortgage lending structure & practice in to the same
market.
The core objectives of this dissertation are as follows:
1. To review the conceptual framework of the mortgage lending system of UK
towards the housing market.
2. To examine the housing prices of UK under pre-crisis and post crisis to
understand the housing boom and bust.
3. To analysis the housing prices trend pre and post crisis in UK.
4. To analysis the housing trend pre and post crisis in UK.
1.4 Research Questions
There were several fluctuations in real estate industry in yesteryears including dramatic crash
in 1990 and the severe crisis in 2007. This dissertation will rely into following research
questions and tries to get meticulous knowledge and key findings regarding UK housing
property market.
 What factors affect the UK housing property prices?
 How mortgage lending system created the UK housing market volatility?
 What kind of housing market trend in UK?

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1.5 Purpose of the study
While the UK housing market is in downturn after the credit crunch and it is realised that the
main cause for the economic turmoil in UK was the excessive sub-prime lending in US and
housing price bubble in UK as well. The credit limit situation in financial market of UK is the
most severe effect given by the credit crunch. The current housing market is slowly
overcoming the financial downturn in property market of UK but due to the market volatility
it can’t be said that the future will not be the same as it is occurred in few years ago. This
dissertation is carried on keeping deep within reach into the related terms and areas of UK
housing market such as mortgage, house prices and factors that affect in price of housing
property. The purpose of study is to understand the objectives of the study and answer the
research questions.
Basically, this research aims to provide findings with justification of the topic for future use
of other personal and academic purposes. The analysis regarding impact of credit crunch on
UK housing property will be constructive in coming years for investors in property market to
foresee the future. Key findings and conclusion along with the recommendation of the study
will be advantageous to many of the associated small firms to analyse the market trend on
UK housing property.
1.6 Organisation of Study
This research has been categorised into six categories to make the study more effective and
comprehensive. Research can easily be studied by others in terms of its structure or
organisation which will surely make the intensify understandings of user or reader. This
dissertation is based on following structure:
Introduction
This section gives a glimpse of whole dissertation and its outcomes. Introduction
category generally explains about background of the dissertation, scope and
objectives of the study. It also takes a tour for the discussion of the concurrent areas
of the topic, which is connected to UK housing market. In this section, the scenario of
credit crunch of 2000s and the history of UK housing market are also explained to
give brief description regarding subject in few extent.

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Literature Review
The second chapter is the review of literature regarding UK housing market with the
factors affecting to the house price growth in UK. It also describes the housing market
context and structure of UK along with the mortgage lending system and the nature of
UK mortgage rates. This section of the study also tries to give the relationship
between of supply and demand of housing market of UK. The literature review gives
few description of volatility market of UK housing and tries to answer the research
questions raised in chapter one regarding the study in some extent.
Research Methodology
This chapter is all about how the research is gone through during the research period.
What kind of methodologies has been applied and what kind of data collection has
been done are also mentioned in this section of the study. Mainly the research
methodology explains the research strategies and type of methodologies which is
suitable for this dissertation topic and the limitations that have been occurred during
the research.
Data Analysis
The fourth chapter regarding data analysis is all about analysing those data which are
related to the topic and processing them to give an effective outcome answering the
research questions and fulfilling the research objectives of UK housing market boom
and busts. This chapter draws the focal point of the studies through several facts and
figures and personal development of researcher to put some research findings. All
data which are collected through secondary approach will be discussed to come at a
certain point where all the queries of subject matter will be satisfy is the crucial aim of
this chapter. In other words the presentation of data has been done under this section
for the UK housing market.
Findings and Conclusions
The finding and conclusion chapter represents the conclusions and findings of the UK
housing market throughout the research. It also draws the key finale scenarios of
housing market of UK along with how much it is impacted by the credit crunch in
overall overview.

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Recommendations
This section of research will provide some recommendations which might be fruitful
in UK housing market study. This part tries to produce some ideas and commendation
through the help of conclusions and findings of the research which are carried out by
the research itself.

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Chapter 2
Literature Review
2.0 Introduction
The UK housing market had been booming in early of 2000’s which rate was much faster
than the household incomes. The crash of early 1990’s was dramatic and the UK housing
market has staged after that dramatic crash with implausible resurgence (Cameron, 2005).The
US housing market was continue to being plummet and most of the UK companies were also
participating either directly or indirectly in the housing boom of the US. There was a situation
where it was feeling like the dash in require of returns in the impact on the economy of UK
and construction sectors. There were so many prospects that were growing to the housing
hunch pushing the economy into economic catastrophe in 2008 of US, which hit many more
UK companies in housing market. In present context of housing market, according to Robert
Gardner, chief economist at Nationwide, slow-moving require for homes on the back of
scrawny labour market situations, communal with only a ongoing rise in the supply of
available properties, has helped to remain prices moderately constant since the summer of
2010 (Norma Cohen, 2011).
There are many opinions regarding the topic to scrutinize and pass judgment on the changes
in house prices and volatile market consequences. In this chapter, research will based on the
critically reconsideration of relevant literatures available to the topic. Review will be
addressing the housing market issues in general along with the specific issues that affected to
the housing prices before and within the crisis. Furthermore, in this section, research will be
focused on to the UK housing market trends and nature to provide clear understanding of the
property market of UK. Research also tries to produce the relationship between supply and
demand in relation with housing property market.

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2.1. UK Housing Market, Nature and Trends (Pre-Dominance of Home
Ownership)
For many reasons the housing markets are atypical in general. Generally houses takes time to
be exists in market so there will not be a situation where demand can be fulfilled immediately
or supply will take little bit longer than other markets. Houses are normally assets for every
individual around the globe and it is the same within the UK which pay the income. The
amount which comes by rent and owner saves it being owner of the house should replicate
the potentials of future house rents. In the context of UK, the ownership of house is
comparatively high to other countries. There is always higher risk on housing market of UK,
prices may go up and fall down shortly. So it is true that the UK housing market is very
distinctive in several ways for numerous reasons. Due to the structure of property market and
mortgage market there will be a situation where easily housing boom may occur. However, it
is more crucial to understand that the housing prices doesn’t continuously increase but they
will in the long run fall down giving a dramatic collide to the housing market (Cameron,
2005).
The housing boom and crash which is appeared few years ago is not unusual for the UK
housing market. The crash and boom of 1980’s on housing market is already given economic
turmoil to the UK. In that period there was 40% rise in housing prices in relation to the
incomes in 1981-1989 (Anonymous, 1997). The 1980’s market crash might have hit to the
market due to quite a lot of reasons such as liberalization of mortgage lending which created
a situation to borrow more, relatively high growth of income, house prices and initial debt
levels both were low to let them to rise, higher rate of housing supply than its demand and
strong growth of population in the age group of key house-buyer. Throughout the decade or
in the beginning of 1990’s, housing boom came to the end with a result of great fall in
housing prices in compare to income.
When comparison made between 80’s crash and credit crunch in 2007, there are major
similarities found in housing boom and crash. To understand the UK Housing market and
how it works, it is crucial to comprehend the size and structure of the market.

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Table 1: Distribution of Dwellings, by tenure- England and Wales, 2001-2008 (Mintel, 2009)
The above tables states that the dwellings in England and Wales are continuously growing till
the 2008 from 2001 along with the dissection of different types of dwellings. It is clearly seen
that the owner dominance in the UK Housing market is higher than others. UK housing
market can be explained through the following diagram.
Figure 1: Distribution of dwelling, England and Wales, 2001-2008
Source: Mintel (2009).
Year
Owner Occupied Socially Rented Privately Rented Total Dwellings
M % m % m % M
2001 14.4 70 4.0 20 2.1 10 20.4
2002 14.6 70 4.0 19 2.1 10 20.7
2003 14.7 71 3.8 18 2.2 11 20.7
2004 15.7 71 3.8 18 2.3 11 20.8
2005 16.7 71 3.7 18 2.4 12 20.9
2006 17.7 70 3.7 18 2.6 12 21.1
2007 18.7 70 3.8 18 2.7 13 21.2
2008 19.7 68 3.8 18 3.0 14 21.4

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According to the figure and data, 70 % of the total dwellings were occupied by owners at the
end of 2008. It is very clear that the UK Housing market is highly occupied by house
ownership.
In between 2001 to 2003, the UK Housing market was more attractive with compare to G7
economies with growth rate of 6 percent (Cameron, 2005). As it is perceived that the UK
Housing market is not constant it has distinctive nature than other financial markets. UK
property market became quite ambiguous at early of 2008 due to recession, the UK was out
looked as both worst and the best investment opportunity and London was slipped from 2nd to
fifteenth in a poll of property experts voted for by the Urban Land Institute(UCL) and PwC
(Thomas, 2008).
According to the Glenigan (The UK Construction Information Service, 2008), private
housing were facing hard-hitting position increasingly with 9% down in value of initial work
onsite. The UK Social housing was also fallen down by 2 percent due to the knock-on effect
of credit crunch (Glenigan, 2008). Today, even though the landscape of UK Housing market
looks very poles apart, the supply of new houses is fallen out drastically to its lowest level
since 1920s.
On the other hand, mortgage deposit needs have blown up in past two decades and the Briton
be expecting to be almost 40 earlier than they can acquire a base on the home stepladder.
There will be a growth in number of households only in England by 27.5m in 2033 a raise of
27% over 2008. It is suggested that the government needs to dig up institutional investment
for the rented housing sector otherwise there will never be sufficient homes that country
needs by Chris Cobbold, director in residential sector at DTZ (Ed Hammond, September
2011).
2.2 Housing Bubble
History states that there were several bubbles occurred to produce financial instability in to
the market such as Wall Street Crash 1929, The Florida Real Estate Bubble, 80’s Worldwide
Property Boom, Dot Com Bubble in 1990 and Housing Bubble of 2000s. According to the
Case and Shiller (2003), the term ‘bubble’ is used broadly but rarely defined. They state that
the idiom refers to a condition where extensive hopes of future prices increase due to
temporary higher prices. If households consider that prices of home are very improbable to

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fall, and definitely not possibly to fall for long time there will be a sturdy bang on demand by
the expectations of future increases, so that buying house is always associated with risks.
According to them, the mere existence on rapid price increase can’t be conclusion as
evidence of bubble because that will be explained by fundamentals of economy in greater
extent. Likewise, the current growth in house prices attributes largely as strong fundamental
of market, meticulously, the income growth and the declined interest rates (McCarthy and
Peach, 2004).
The complete phase of Housing Bubble has a life of 6 years more or less. An archetypal
Housing Bubble generally is quoted when the 50 percent increase in real prices over 3 years
of duration along with 25 percent turn down over the following 3 years. At the closing stage
of hurtle of housing prices are around ten percent higher than the where it was at the
beginning (Cecchetti, 2003).
In many countries, house prices were hyped which can be seen through the wandering
relationship between rents and the house prices. In relation to the Britain’s rent, prices of
house hit the record levels along with record level to the incomes to the UK. It was being
hard to landlords for making money due to the fallen rental yields below the mortgage rates.
So that there was a situation where investors were prepared to buy the houses in large number
and rented them even in loss due to the expectation of increase in housing prices
continuously, as a result there were massive transaction for property buying and selling (The
Economist, 2005).
According to economicsonline, the trend of house prices and long-term shortage of houses
encouraged to those buyers to enter the market for the first time along with investors to
borrow and lend for home constructions. This situation is favourable when housing prices
rises but not when the bubble bursts and brings cataclysm to the economy
(http://economicsonline.co.uk/Competitive_markets/House_prices.html).
According to the Nationwide Building Society, UK House prices change shows that when the
alternative investment opportunities become less attractive like low interest rates and profits
and share prices of company are low then there will be situation of house price bubbles and
following crashes. It is due to the inflation because of house prices rise which looks like
property as a safe investment for house owner, asset managers and investors in general as it is
occurred in between 2007 and 2009.

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Figure 2: UK House prices, % change year-on-year
(Source: Nationwide Building Society: www.economicsonline.co.uk)
2.3 Housing Price Measurement
It can be explained that the different concept of housing prices and the way it can be
measured. That would be problematic for the measurement of housing prices in both ways
either practically or conceptually (Thwaites and Wood, 2003). There are too many literal
ways to measure the housing prices but the quandary is they can produce ambiguous and
inconsistent information regarding the changes in inflation of house prices. The main reason
behind the dilemma of the context is house prices are very much complicated for the
measurement because two dwellings are not same and it is very complex and hard to predict
reliably on the sales price of given dwelling until it is not being sold.
Doing measurement of housing price is relatively difficult so that there are constant-quality
measures housing prices which endeavours to compose standardisation and analogous over
time. Basically, there are three methods to measure the housing prices and they are Repeat
Sales, Hedonic Regression and Mix Adjustment. Repeat Sales method is centred on sales
prices where it observes the sales prices of a particular house at two different point of time
and it will generate an estimation of general inflation of house price between these two
transactions. Through the help of this method the yearly inflation of house prices can be
estimated. In present context, the Repeat Sales method no longer exists in UK but it has been

14
used in USA. According to the Hedonic Regression method, the house prices depend upon
their physical features and spot which assess the value. Based on that value the house is
placed into the market representing those attributes. The estimations are then used to
assemble a price for artificial house which is having a representative amount of each feature.
The method of Mix Adjustment to measure house prices, observes grouping the housing
prices into ‘cells’ or ‘sets’ of study on houses with exact physical characteristic and location.
When all data are allocated in a sample to call then the mean price of houses from every cell
is considered (Thwaites and Woods, 2003).
Many house price indices in UK are actively in use but Nationwide, Halifax, Communities
and Local Government (CLG) and Land Registry are in use widely and most commonly
(Thwaites and Woods, 2003). In spite of being slightly differences in these indices, they are
undisputed in general way of growth on houses price presented over the period.
2.3.1 Demand and Supply Theory of UK Housing Market
The theory of demand and supply is basically used in this dissertation to investigate the data
and mention that how the research outcomes have posh the UK Housing prices. The demand
level depends upon various factors that work mutually at the similar time. The amount buyer
desire to purchase at assured price determines the demand (Parkin, 59). If it is the case of
supplying any product is related with the producer, building houses are dealt by the
components of a society. The combination of land, labour and capital should be there to
produce an effective output with a wish to sell them by producers (Parkin, 64). But the fact
there are other several factors that makes difference on the supply of housing in quantity.
In recent periods there has been deficiency of housing supply thanks to the rapid increase in
demand. If producers become unable to react according to the changes of demand such kind
of housing shortages may occur most of the time. The best method to understand the
deficiencies in housing market is to take help by the demand and supply curve of housing
which demonstrates a clear picture of it. Before analysing the demand and supply curve of
housing market, it will be fruitful to take a look into housing demand and supply individually.
A) Demand for Housing:
The demand for housing is established through number of factors which includes
house prices too. Demand for housing leans to be converse relationship between

15
demand and house prices. The opposite relationship can be mentioned in reference
with income and substitution effect with all goods (economicsonline).
Figure 3: Demand for Housing
Source: (http://economicsonline.co.uk/Competitive_markets/The_housing_market.html)
If it is price related, at the higher prices real incomes will fall down and people
definitely going to reduce their demand. In such case the best alternative for house
owning or property owning will be renting. In another word, at higher prices renting
looks more attractive and individual may more likely to rent houses. But the inverse
relationship again takes place if the prices are lower, people tend to buy or own the
property. However, the demand for houses seems to be tentative in some extent, so
that the rise in house prices may lead to a rise in demand as individuals foresee a
provisional gain. In prospect of demand it is necessary to understand the change in
demand. According to economicsonline, “Changes in any of the underlying
determinants of demand of houses will shift the demand curve to the left or right.” For
example;
Figure 4: changes in demand
(Source: http://economicsonline.co.uk/Competitive_markets/The_housing_market.html)

16
The non price determinants in housing demand includes population, income of
households, social trends, availability of credit, fashion, price of substitutes, buy-to-let
demand, expectations and interest rates. These factors will be described thoroughly
later on in this dissertation.
B) Supply for Housing:
Housing supply is also partially determined by its prices along with the number of
other fundamental determinants. In terms of supply of housing and prices, there is
always positive relationship because higher prices of house encourage builders to
construct more building where existing house owners are encouraged to sell the
property.
Figure 5: Supply of Housing
Source: http://www.economicsonline.co.uk
While the housing supply positively related to the prices of house, the supply curve is
always upward sloping. Nonetheless, supply is quite inelastic due to some legal
complexities along with time lags mostly to the case of new builds.
Change in prices of house leads to a shift to the existing supply curve of the property.
There are many other non-price factors that will put on impacts to shift in the supply
curve such as costs, technologies, subsidies, government legislations, availability of
factors and costs. Changes in any of the underlying determinant of supply curve

17
makes to move itself from one place to other and that means movement of supply
curve due to supply.
Figure 6: Shifts in supply
Source:http://www.economicsonline.co.uk/competitive_markets/The_Housing_Market/html
The demand and supply theory of housing market will give more understanding regarding the
relationship between demand, supply and prices.
Price Supply
P2
P1
Demand 2
Demand 1
q1 q2 q3 Quantity
Figure 7: Demand and Supply graph: Supply Deficiency

18
The figure shows that shortage exists in the market through the demand and supply curve.
The original equilibrium is the point where demand 1 and supply curve intersects each other
creating a situation with house prices p1 and quantity q1. There is shift in demand curve with
growing demand in the market while the price is p2 where q2 is expected quantity for that
particular period. Q3 represents the demand of individuals for the housing market if the
prices will stay at p1. The supply deficiency or shortage is shown by the difference of q3-q1.
2.4 Factors Affecting House Prices
There are always two sides to understand the factors that affect on housing prices; demand
factors and supply factors. The combination of these factors creates the bubble in housing
market.
2.4.1 Factors from Demand Side
Generally, when the demand increases definitely there will be increase in prices of the
products. Same thing happens in the housing market as well. When demand for housing
increases the prices of house automatically increases. In the recent boom years there are
several factors that affected the housing demand in UK. They are real income or economic
expansion, consumer confidence, interest factors, demographic factors, accessibility of
mortgage finance, unemployment and assumptions.
Income
Income is one of the most effective factors to make impact on housing demand
because the more money individual or people have the more to be expected to take
out the mortgages and purchase the houses. Usually GDP measures the housing
income because house prices seem sturdier with GDP even though there are few time
lags.

19
Figure 8: Correlation between GDP and House Prices (Aoki, 2001, p462)
Figure 8 exemplifies the correlation between house prices and GDP along with the
changes in GDP are very narrowly correlated to the changes in prices of houses. From
the data which are presented already, it can be state that the higher the income of
people higher the chances to purchase of housing from the individual basis, setting in
motion up the housing demand.
Interest Rates
People may change their perception and willingness to buy the houses according to
the available interest rates on mortgages. If interest rates are low, people are more
probable to take the loan but they will pay less willingness to borrow mortgage loans
when the interest rates are high.

20
Table 2: UK interest rates, 1990-2009
Source: http://www.houseweb.co.uk/house/market/irfig.html
According to the above data, since 1990 in UK the interest rates are falling down
which creating a situation where people tend to borrow mortgages because they don’t
feel any worry regarding the payments for mortgages. It can be said that the mortgage
payments are becoming more affordable. The trend of interest rate fall has actually
Year Rate
1990 14%
1991 10.50%
1992 7%
1993 5.50%
1994 6.25%
1995 6.50%
1996 6%
1997 7.25%
1998 6.25%
1999 5.50%
2000 6%
2001 4%
2003 3.75%
2004 4.75%
2005 4.50%
2006 5%
2007 5.50%
2008 2%
2009 0.50%

21
kept the affordability of houses more reasonable even though there is rapid increase in
housing prices (Houseweb, 2009).
Consumer Confidence
There is always relationship between the growth of houses consumption and
confidence of consumers. The effect of consumer confidence in housing prices is also
key factor because if individuals have high confidence to make demand for houses the
demand will increase in the market and according to the supply and demand law,
prices will go up. Berry and Melissa (2004) analysed the relationship between
consumer confidences in general consumption levels. The following figure may
elaborate in clear way regarding consumer confidence at consumption levels from
1974 to 2002.
Figure 9: Consumer Confidence and Consumption
Source: Berry (2004, p282)

22
The movement in figure shows that the confidence is always closely related to annual
real consumption levels over the past 30 years. It identifies how much consumer
confidence can affect the housing prices in UK. It can be said that the consumer
consumption may impact on housing prices significantly because when confidence of
consumer is high people expect high that the market will be increasing as it was
increased before (Berry, 2004). So this expectation makes people to more willingness
to borrow the perilous mortgage loans. In the early of 2000’s same trend occurred
with high level of optimism and higher confidence by consumer and it lead to take out
mortgages with very high debt to income ratios. As result, house prices started to
increase at steady tempo and people believed that the housing prices will keep going
up. In fact, they had a notion that prices would keep increasing and so does the value
of houses and they will be able to remortgages to sort out other things; at the end they
would be able to pay back all mortgages.
Demographic Factors
Demographic factors such as divorce rates, immigration, life expectancy, children
leaving home before than they get mature are increasing in UK with less marriages
which has ultimate impact on housing demand. Since 1970’s the divorce rate of UK
is increasing. The following graph is a finding from office of National Statistics in
between of 10 years of gap, which shows the increasing divorce rate of 1929-2009.
Figure 10: Divorce rates, England and Wales, 2009
Source: Office for National Statistics, 2011

23
The prickle in the divorce rate of England and Wales at graph in early of 2000’s is
clear to understand the one of the reasons to increase in housing demand. Divorce
creates a circumstance where people have to look for alternative accommodation after
separation with partners which resulted into the higher housing demand.
Figure 11: Number of Divorces by Age in England and Wales 2009
Source: Office of National Statistics (17 Feb, 2011).
According to stats available from the Office of National Statistics, in such years when
divorces have increased but the number of marriages are comparatively low. It is
obvious that when number of single people increases the demand of houses also
increases. The following chart shows the number of people who are divorced by age
group in UK.

24
Figure 12: Marriages United Kingdom 2009
Source: Office of National Statistics (March 2011)
The graph shows that the numbers of marriages are rapidly decreasing since 1970’s. It
also shows that an effect on the various types of houses which is necessary in the
market. The more single people the more housing requires as smaller apartments and
often for the rental.
In the prospect of UK, the high level of immigration is also putting the apprehension
on the UK housing market with large volume of people coming to UK creating greater
housing demand. According to the Office of National Statistics, the immigration is
increasing in steady pace since 1990’s in UK which also contributing to increase in
emigration. Furthermore, the number of people coming in UK is more than the people
leaving. It can be said that the net migration level is still positive. The following
figure may produce the trend of immigration, net migration and emigration of UK
which ultimately going to make impact on housing market influencing to the house
prices.

25
Rolling Year (YE= Year Ending)
Figure 13: Long-term international migration, UK, 2000-2010
Source: Office of National Statistics (May 2011).
Note: 1) Figures for YE March 2010, YE June 2010 and YE Sep 2010 are provisional.
2) UP to YE Dec 2009, data are only available at six months interval.
According to the figures from the government of UK, 5 millions new houses will
require in United Kingdom until the coming next 20 years due to the high volume of
immigration (workpermit.com, 2006). It is noted as severe problem because there is
no sufficient response from supply side of the housing market to such high level of
housing demand which is growing rapidly. Figure 15 shows the rapid inclination in
the prices of houses in UK at 2003-2005 and the net migration states the correlation
between both. So, there is no doubt that the immigration has had great impact on the
housing demand of UK.
Speculation
Another demand side factor is speculation to make impact in some extent to increase
the housing prices. Investors can buy a huge portion of properties for the buy-to-let

26
purposes making capital gains and to earn the income through the rent. In this
situation, investors buy houses during the housing price is increasing and when
market is about to turn they sell it and this type of activities in housing market creates
high volatility into the industry. This all happens because investors buy houses or
properties in boom and sell in bust.
Unemployment
Low unemployment is also a factor that push ups the demand of houses because at
low unemployment level, the number of working people rises and those people can
afford the mortgages and they tend to buy houses.
Figure 14: Employment and unemployment rate of England, 1971-2010
Source: Office of National Statistics, Feb 2011
From the figure 16, it can be viewed that the rate of unemployment is steadily falling
down since mid of 1990’s i.e. 1996. Figure states that there is around 8 per cent as to
low as 5 per cent in the mid 2000’s. Before crisis hit while the market was booming at
that time the rate of unemployment was very low, this definitely made effect on the
demand of houses.

27
2.4.2. Supply Side Factors
The nature of supply side in housing market is little different because it responds quite
slowly. The reason is the supply of houses would take longer to meet the housing demand
because building houses takes time. However, there are very few supply factors which make
impacts to the housing prices due to the supply shortage in housing market this means that the
supply side is unable to address or respond the housing demand in the market which is
rapidly growing. The supply side aspects that can have upshot on housing prices are
availability of resources, legislations laid by government, costs and subsidies (Economics
Online). The availability of supply of houses would be affected by the number of individuals
who prepared to sell their houses at prearranged point.
Availability of resources such as land and labour has greater effect on building new houses.
Especially the land which is very limited in short run but labour is also equally important.
United Kingdom is very small country in terms of geography with compacted population. So,
it would be very difficult to find the spaces to build new buildings or houses to respond the
increasing demand of housing market. That means there is low supply of houses with high
demand leading to increase in housing prices. The cost of building houses can be very high
and that produces higher prices for houses in market where costs include the raw materials
and cost of labour.
In various ways the legislation which is placed by government can have an effect on the
housing supply. In UK, there are authoritarian prerequisites for planning consent for new
houses that may hold back the process of building new houses. However, government would
give subsidies to the house builders to encourage the supply of houses.

28
Figure 15: Dwelling completed in the UK, 1949-2005
Source: Chamberlin, 2009, p.36
Figure 17 figuring out the completed dwellings in UK till 2005. In 2001 the building is
picked up slightly but still remains comparatively slow to the historical levels. To illustrate
more regarding dwellings in UK till 2010, the following diagram will be more fruitful.
Figure 16: Annual Net Dwellings 2000-01 to 2009-10, England
Source: Communities and Local Government (CLG)

29
The stumpy reaction of housing supply to the price indication is often said an evidence of
complex planning system which has been done overly. To build houses takes large amount of
money and longer time and it tend to favour to the large companies which has sufficient
resources reducing the market competition.
2.5 Volatility of the UK Housing Market
The Housing prices boom in UK is due to the volatility of the UK Housing market, it is
argued by the Gavin Cameron from the department of Economics of University of Oxford
through his paper called ‘UK Housing Market Economic Review’ (Cameron, 2005). The
Housing market of UK is one of the most volatile in the world, there is no doubt. There are
several passionate concerns regarding the problems which brings and includes the issue of
lower income based households being priced out of the housing market. There are differences
in price growth of houses with deep structural variation in the housing demand which
requires different sort of policies responses. Due to its volatile nature UK housing market
creates ‘winners and losers’. According to the Joseph Rowntree Foundation (JRF), the UK
housing market and its volatility can be understandable in 3 different fields
(http://www.publicnet.co.uk).
2.5.1 National Picture
The market demand either high or low both may causes the problems, generally. Low income
people are priced out of their local area or the place where they need to be find job in that
area where the house prices were high and on rapid growth. In such cases, low and falling
prices affect to the homeowner’s capacity to move in different area along with discouraging
new residents from moving in due to low-demand areas. The scenario before the credit
crunch and downturn in housing market, the policy of affordability was concerned more
importantly. JRF mentioned that the volatility was seen as a national problem with its
extraction in an impassive supply side was at a notable low despite a floating market in house
building.
To stimulate more house building within the country and for macroeconomic policy to
reasonable market’s boom and bust nature is the solution which is felt by JRF according to
the paper on www.publicnet.co.uk. According to the housing market cycle in recent period, it
last around 18 years in terms of real price. The previous boom was at late of 1980’s and the

30
recent one was in 2007 but the difference is the latest cycle was longer than the previous
ones. In such cases, political and economic stability plays vital role to keystone for the
growth of any housing market.
However, the comparative permanence and the length of the contemporary market cycle
might have contributed to its ultimate downfall. When it was extended to high growth rates to
several parts of the country and advance merged the magnetism of house owner occupations,
and then it also priced out many people out of the market. The situation was a time of very
sturdy market ‘fundamentals’ such as higher household growth, low supply, increasing
wealth but also low cost finance and generous credit. It is clear that during the constant
period of the market growth there was regional gap in the prices of houses widened. Only in
London led in the late 1990s whilst other parts of UK lagged behind. These gaps were most
intensely experienced in the area of deficiency significantly. By the time passes the
undulation reached more rundown part of UK in the mid of 2000s cause cycle was going to
an end and at the same time these areas had inadequate time to make it to catch up along with
the growth which started from a low base. Being the affordability is key anxiety the extreme
impact was in London and south of England but there was negative impacts across the entire
UK (www.publicnet.co.uk).
2.5.2 Regional and local deviations in the Housing Market
It is essential to understand the discrepancy among and within regions after knowing the
broad national picture of volatility of housing market of UK. This is obvious that the certain
areas of the country have been out of engaged from the national market and they experienced
volatility of market in different way. The online paper published on www.publicnet.co.uk by
Ferrari and Ray (2011), the drivers of market transform at local level are not inevitably the
similar as those are functioning nationally. Furthermore, growth rate in number of households
comprises consistently higher in south of England than the other parts of UK. The market size
was varying despite of convergence, still few number of them than 2/3 of households in
Scotland and north-east of England hold homes in comparison to other parts such as Wales,
Northern Ireland and England where as the wealth of household has been rising everywhere.
In England, it encompasses that there have been distinctive market intercession in low-
demand parts in north and the south with high demand. Renewal programmes were
introduced to fight with the structural changes in such areas where low-demand with

31
destabilized local housing demand is. As problems which were seen are declination in
population, weaker local economies and the underprivileged housing stock and they need
involvement from the local level. There might have impact on price levels on housing market
for the renewal in low- demand areas in UK but the evidences say the trend is already to an
upward route. As it is said, price degree of difference stay on as problem even impacts on
supply in low- demand is positive.
2.5.3. Housing Market and the Residential Mobility
The degree of relations and disconnections between regions may supply to volatility where
deficit also plays vital role to correlate narrowly with the market volatility. It is clear pattern
that the areas of similar type will remain closely linked in great extent. Some evidence states
that ends of the housing market scales are secluded from other markets. It is not such
unexpected but it lifts up the crucial policy issues which is not yet been addressed adequately.
According to the research done by Ferrari and Ray (2011), it is found that the scarcity and
volatility of market go together in equal way. They argued that the imbalances in links
between different types of areas might add or supply to localise the market volatility. The
disparity prototypes of residential mobility in UK effect in moves of larger distance between
many areas which are deprived than they do with the less deficit locations. They mentioned
that it can be seen as a type of volatility which is not well understood at current period as
‘spatial volatility’.
The volatility of UK housing market also can be described in terms of the mortgages. UK
based mortgages are mostly unpredictable interest rates mortgages where re-mortgaging is
comparatively easy to the loan to value rates because the loan to value rates have a tendency
to be higher. It is very crucial in UK to understand the interest rate fluctuations in short run
due to the inconsistent interest rate loans.
As it is already stated that the effects of housing market change such as effects on individual
households is also important to recognise the UK housing volatility. As prices of houses
increases that make house owners feel wealthier and that led to consume in larger amount
along with having strong collateral to make borrowings. So, it is good economic performance
when there is effect on house prices rising (Cameron, 2005). According to the review, the
problem which has acknowledged is regarding housing supply and its effect on the prices.

32
Housing prices were increased due to the sensitivity of supply of housing has fallen down and
require of supply to communicate to the increasing demand. Comparing the housing boom
from 1980s to the 2000s, it can be seen that 1985-1988 the dwellings completion was rose
every year by 30 percent but 1999-2002 there is only 2 percent (Cameron, 2005). It is very
crucial to receive the supply to communicate to demand better in order to maintain the prices
from increasing too much.
2.6 UK Mortgage Lending
Using the mortgage note making a secured loan by real property is known as mortgage loan.
This means that showing an evidence of any property to the banks or any financial institution
from the people who are willing to buy or purchase a new house for residence purpose or
commercial purpose and securing loan. The flexibility range in the mortgage market has
raised and its availability including different types of mortgages made great impact on the
UK housing market. Many mortgages were introduced at the same time legislations were
being relaxed regarding the mortgage lending. Mortgage lending are always riskier that is
why the riskier mortgage finance chipped in to the housing bubble.
The increasing crisis in the sub-prime mortgage of US at the first half of 2007, UK market
received increasing attention in such country where the sub-prime market was keep growing
since 1990’s. At that phase the interest rate was arose from a distress that a same condense in
the field with strengthening defaults, the disclosure of pervasive hasty and institutional
malfunction, voracious and falsified lending was increased in the UK, so inclining the wider
housing market has gone to recession. There is no doubt that the ensuing impact of US sub-
prime crisis on the liquidity of world money markets made a great impact on the mortgage
market of UK. It impacted in different ways with higher costs of financing mortgages from
the market of wholesale which has kicked in and the assortment of dicey or dodgy mortgage
product which is declined along with plummeting not only the price and supply of new
mortgages but also menacing riskier borrowers wishing to re-finance their mortgages
(Springett, 2007).
The study from the international level shows that the mortgage market of UK is relatively
efficient (Diamond & Lea, 1992) and complete in terms of the range of product (Low et al;,
2003). According to a survey done by Mercer Oliver Wyman in 2003, the mortgages were

33
readily available only in UK. This means that the public of UK were keenly marketed with
great and high public awareness. On the other side, mortgages for people who turned into
bankrupt were limitedly available in UK and Denmark only. Those findings made sure that
the existence of a comparatively well-developed sub-prime mortgage market in the UK.
Barring of both the subsistence finance endowed by non-mainstream lenders and definite
groups from the conventional mortgage market has had predecessor in the UK housing
market. According to Merret (1982) the lowest income house- owners were presumably to
buy homes with cash due to being deficient in accessing the mortgage finance. A researcher,
Valerie Karn found that in such areas where is poor housing, ‘fringe’ banks and financial
institutions those have had higher interest rates played very important role in lending
mortgage finance because building societies did not agree to lend there (Stephens, 2007).
History traced out the several mortgage markets in UK but the materialization of modern sub-
prime market in mortgages was in the 1990’s. At that period, predominantly to an escalation
in demand arising first from the numbers of households whose economic condition worsen so
that they could not admittance the typical or conventional mortgage finance. The omission of
the households from the conventional mortgage market has gained finance by the espousal of
automatic credit-scoring. Which has gone through mainstream lenders; which was a
secondary factor. To this novel foundation of demand that might add pre-existing pent-up
demand form households still ‘rationed’ out of the deregulated market of mortgages that still
priced without consider to personage risk. In an interview which is carried out with financial
market performers in a study of Joseph Rowntree Foundation shows that the many
households’ financial position has been weaken (Munro et al., 2005). According to that study
the consumer groups gave more emphasis on the conception of demand by means of
structural changes in the economy for the increase in demand for sub-prime lending. They
identified the structural changes which includes non-secure employment growth along with
the widening variation with poverty growth.
Furthermore, an issue was the growth in the dynamism with those debts which were chased
by the lately privatized utility companies. More than 8 million Country Court Judgements
(CCJ), were registered around the mid of 1990s and outstanding, those were the most
commonly allied with non-standard lending (Burton et al., 2004). Not only the numbers
swelled by the mid of 1990s did matter on behalf of that particular reason , but the lenders
who frequently has taken out themselves into account through the way of non- flexible which

34
led them to introduce automated credit-scoring increasingly into their underwriting
processes. Moreover, the introduction of credit scoring took the large segment of population
to being deprived from the borrowing money from conventional institutions (Burton et al.,
2004). A survey regarding the mortgage lenders traced out that less than half were still in use
of credit scoring in between end of 2005 and early of 2006. It is clear through the studies that
the credit scoring had been adopted already in wide perspective by those who dominate the
lending market as lenders.
It is obvious that the riskier mortgage finance of UK also provided great contribution to the
housing bubble in the property market. People were permitted to take out more with little
furthermore no credentials of their assets or property, income or employment. The market
actors assumed that the trend of prices of housing which was going up at higher pace will
keep continue and then they can sell the houses with certain profit in case of the people could
not make it pay it back. But, likewise there is a saying that the boiling water can’t keep
boiling it has to be stop, it has certain period of time, booming prices gone off and then the
crisis hit all over the world’s economy including UK housing market which is known as
severely impacted with compare to others.
UK mortgage market is largely ruled by the variable rate of mortgages in general. That is
why the UK market is often known as volatile. In the year 2003 the UK mortgage market had
following structure:
Figure 17: Types of the mortgages in the UK, 2003(Source: Miles, 2004, p6)

35
The housing market of UK is much more dependent on the interest rates due to mortgage
market structure than to other markets where the mortgage rates are fixed or it is favoured. As
it stated earlier that the UK mortgage market is based on the variable rates, a variable rate on
mortgage means a mortgage payment will change if there is change in interest rates. In the
context of UK, the rate may be appended to the bank of England’s base rate or it can be
determined to other variable rate for instance lender’s changeable rate.
Tracker mortgages are based on the base rate which should be at above the margin. This
means that it follows the Bank of England’s base rate adding certain percentage on it. It is
agreed on to be a fixed duration and thereafter the mortgage will be switched to the variable
rate of lenders’ standard. These kinds of mortgages can also be for lifetime where the period
is not specified but the rate would be above the margin until the mortgage is paid off (Credit
Choices, 2010a). The discount mortgages are different because they are not linked to the
Bank of England’s base rate but tied to the lender’s standard variable rate (Credit Choices,
2010a).
The pie diagram shows that the 70 per cent of UK mortgages are dominated by the variable
type of mortgages. When the Bank of England’s base rate swings then the monthly
repayments also varies, this is the main issues with the variable type of mortgages.
The other term in mortgage is buy-to-let mortgage which is basically such mortgages which
are for private investors to buy the houses for the rental and accommodation purposes.
According to Ball (2006), the property is an asset for investment on which investor can retain
the margin from rent and secure the capital gains as housing prices increases over the period.
This buy-to-let model has been introduced in 1996, which contributes easier and affordable
access to opening the market for the stacks to achieve the rented market along with access to
finance (Mintel, 2009).
Early of 2000s, banks and building societies were more confident regarding the boom
believing that it’s going to be continuing and relaxed mortgage lending. By the time passed
on new type of lending were introduced in the market which created a circumstance having
easily accessible mortgages and it was happened during the height of housing boom for the
house buyers. The new type of loan the sub-prime loam has been introduced which can be
accessible easily such as those customers who were not eligible for banks. This new system

36
brought the financial turmoil that eventually hit to being the collapse of the UK housing
market. The main reason for the
In spite of the severe crisis on UK housing market which certainly includes the UK
mortgages, recent reports shows that there are 11.3 million lenders in UK including banks,
building societies and other lenders who undertake the 94% of residential mortgage lending
worth of £1.2 trillion (CML, 2011).
2.7 Summary
This literature review has been carried out through the help of several studies, journal articles,
online databases and news paper articles that have attempted to analyse the current scenario
regarding UK housing market. This research tried to related areas that are linked with general
structure of UK housing market, mortgage lending, increasing trend of house prices along
with the downfall of property market and the factors that influenced to increase housing
prices in UK. From the review, it is apparent that the financial turmoil has been affected the
UK housing market due to the volatility market of UK housing.

37
Chapter 3
Research Methodology
3.1 Introduction
A methodology chapter always carries or provides a way that literally states the design of
research and research methods (Marshall and Rossman, 1995). Giving more focus on this
statement all keen sights were used on more details about the research design, alternatives for
the methods of research and research strategies in this chapter. Basically, in this chapter we
are stating the way we carried our whole work or research along with an answer of in what
way this dissertation will be productive for future research purpose and in other different
investigation relating to this topic in few extent.
The main function of the research methodology is to explain more accurately and validly how
this chapter is structured and provides the perfect output matching with research objectives.
Other functions of this chapter like how we are going to allocate data and gather them for the
research purpose and how we analyse them to make sure that provides the outcomes more
accurately which are valid. This dissertation is based on secondary research which is heavily
relying on secondary data from various external sources.
The structure of this chapter is normally categorised to give more precise information
regarding research and its outcomes. In this chapter, researcher will discuss regarding the
research strategy and research philosophy to give a glimpse of what exactly research is and
what are the core objectives. This study will try to justify the topic as well.
3.2 Research Strategy
It is already stated that, this research paper is based on secondary data, which are collected
from several outer sources. During the research decision has been made to use secondary data
collection method and analysis because of its advantages like availability of qualitative
statistics resource, morality and time saving. This method also endows to coverage of wider
selection of information and the conclusions that are made can be wider as well. The topic of
the study also does not allow much preliminary research to be conducted as it is a quite

38
complex issue as calculating and measuring the impact of credit crunch on housing property
and its prices requires huge amount of resources and technology. All the statistical data used
and analysed in this research would be impossible to gather without the use of secondary
research method or secondary data.
This is theory based research that aims to criticize and analyse different perspectives related
to the UK housing market and the impact of credit crunch on it along with housing prices.
The main focus is on others’ ideas with the researcher’s own developments regarding to the
subject and topic to generate a valid and reliable outcome.
3.3 Research Philosophy
The word and term research philosophy is related to the knowledge development and the
nature of that knowledge. Basically, research philosophy encloses important postulations
about the way in which we vision the world through the research (Saunders, Lewis and
Thornhill, 2007). In another word, research philosophy literally means the way in which data
are collected, analysed and used for the observable fact.
3.3.1 Positivism
Reality is stable and it can be studied or observed and described standing with an objective
view point (Levin and Greenwood, 2006). Positivism believes that study can be made without
making any interference with the phenomena. This philosophy frequently involves
manoeuvring of realism with distinctions in only a single self-regulating variable which can
actually discover regularities in the social world and it also targets to form relationships
between, some of the essential elements as well.
3.3.2 Interpretivism
Interpretivism philosophy based researcher might make the interference to the reality for the
study. There would be interpretation of subjective phenomenon to full understanding.
According to this philosophy, the study will be very fruitful because if the study of
phenomena in natural environment will be easy to acknowledge and that really affect the
study. There will be interference in reality but that will be managed by the researcher as a
part of the scientific knowledge which they are pursuing.

39
This research is based on the positivism philosophy. The housing market of UK and the facts
and figures of related industry are real. Research will not going to make any interference on
it, but it will look into the scenario within housing market. This research will be carried
focusing on its object which is to understand and acknowledge the impacts of credit crunch in
UK housing market especially in house prices and mortgage lending.
3.4 Justification of Topic
From the economic and personal aspects, there are many ways which can make justification
regarding subject matter to conduct the research. This research basically intends to gather,
examine and summarise existing literature of house prices and its trend, effect on mortgage
lending and the UK housing market. The housing prices were increased in past years which
did not affect only to the individuals but they have also severe impact on the economy as
well. The main concern of this research is to find out in what extent the credit crunch hit to
the property market of UK along with to acknowledge the trends and consequences of
housing market before and after.
The housing prices were kept increasing since 1998 to mid of 2000. When the credit crunch
hit the economy and then people realised that they can afford to get hold of no more
mortgages as like they had before. An example of trends of housing market, according to
Martin Gahbauer, there will be recovery eventually, but cycles in housing are very long
(http://www.bbc.co.uk/news/business-11914386, BBC News). Due to its on-going nature and
issue there will be difficulties to provide recommendations for the future course of action.
But after the careful study and analysis of available data and information, few conclusions
can be made through this research.
3.5 Research Design
Research designing in project is similar to the architect designing for a building (Hakim,
2000). It is a general sketch to carry on the research with an aim to answer the research
questions. The main purpose of research design is to understanding about the type of
questions or questions to study, and then relevant data which should be collected and how we
will analyse them for the best results.

40
Research design can be categorised into two category i.e. quantitative research design and
qualitative research design. Where quantitative research design is more based on experiment
but qualitative is based on Case Study and Ethnographic Study. Some of the researcher
segregated the research design as exploratory and descriptive.
This research is regarding UK housing market and its ups and down along with credit crunch
over the periods, so it will be more complex to produce experiment for the results. In that
distinction, this research will be carried on through the qualitative research design with more
freedom in data collection to produce better outcome or results. Let’s say, this research is
based on descriptive design or it is descriptive research.
3.6 Data Collection and Methods
Data collection simply belongs to gathering facts and figures to access information. Data
collection is described as a process of preparing and collecting of data. Data can be either
primary or secondary. Data collection varies according to the nature and objectives of the
research.
3.6.1 Primary Data
Primary data are those which are collected or observed originally or first hand. Those data
which are not used before for any purpose and those are collected for the first time for certain
research or any other purpose is called primary data.
3.6.2 Secondary Data
Those data which are already published and used for other purposes are called secondary
data. Secondary data includes published summaries and raw data. Generally, secondary data
are divided into 3 categories. They are Documentary, Multiple source and Survey.
This research has been carried on using the secondary data collection method in terms of its
several benefits. In this research, there will be sufficient use of the different written and non-
written materials, financial reports, books, journals and surveys done by different
organisations or person along with government. Furthermore, various types of internet
databases will be used to access the data regarding UK housing market and credit crunch.

41
This research work has been done believing that those sources of secondary data will produce
reliability and validity for better outcomes.
3.7 Case Study
Case study plays vital role in research process to understand complex concern or object and
also can widen knowledge to that understanding which is already known all the way through
previous researches. Case study research method is an empirical study that looks into and
analyse an existing phenomenon within its real life degree whilst the boundaries between
observable fact and circumstances are not clearly palpable; and where various sources of
substantiation are used (Yin, 1984).
This research is mainly carried on through the several case studies which are already been
done. Case studies are generally more reliable due to its validity. While the UK housing
market is based on facts and no one can change the realities, this research has been done with
the help of several case studies and its findings along with personal developments with the
subject matter.
3.8 Data Analysis
After the completion of collecting data from different sources for the research purpose
suitable with its objective, data are analysed to find or recognise whether the collected data
met the requirements and expectations of research along with its quality. Data analysis is not
only calculating and evaluating the data and information it is also about preserving the logic
of analysis.
Data analysis can be qualitative analysis or quantitative analysis. Quantitative data are based
on meanings which are basically derived from the numbers (Robson, 2002). It can be said
that the collected results are presented as numerical and standardised data where it is analysed
through the use of diagrams and statistics. Qualitative data does not have any standardised
form or approach to the analysis. Qualitative data analysis is done using the conceptualisation
method where those data are based on such meanings which are expressed in words.
This research has undergone through both data analysis method to make the research more
fruitful. Data for UK housing markets are based on quantitative data so it has to be presented
on this approach where as the literature regarding housing markets are through qualitative.

42
So, this research is done through the combination of quantitative and qualitative data analysis
to generate better results on subject matter.
3.9 Limitation of the Study
This dissertation is based on the UK housing market; it does not represent the global property
market. The drawback of this study will be in some extent due to its limited resource and time
to accomplish in regard of UK housing market. There are several sections even in the housing
market but the core objective of this research is to understand the impact of credit crunch on
UK housing market through the fluctuations in housing prices and the mortgage structure of
UK sub-prime lending; it may not cover the overall related field of housing market. The data
are collected from around 2000 and to till date as possible as it is available. There will not be
exact accounting period data due to its availability.

43
Chapter 4
Data Analysis
4.1. Introduction
This chapter is demonstration of the data which are collected from several online databases
and secondary research related to the UK housing market. These data were collected to
provide the findings and answers for the questions rose in chapter one. This data analysis
section of the dissertation is actually focused into the research objectives which were set up
before starting the investigation on housing prices of UK making base on the impact of credit
crunch on UK housing market. The fundamental goals of the dissertation drove to the
subsequent data collection and data analysis. All data were taken from the secondary sources
and all analysis is carried out with personal development throughout the dissertation giving
emphasis on the prices of UK housing market. This section is able to accomplish the
objectives which were set up earlier.
4.2 UK Housing market before the Credit Crunch
The early of 2000s is financially sound years with growth rate everywhere including the
property market. But eventually there were several economic fluctuations were occurred
leading to massive increase in housing prices in UK. The following focused area will provide
more description of UK housing market in between 2000- 2007.
4.2.1 Housing Prices of UK Housing Market before the Credit Crunch
Due to the housing price bubble there was massive hit on financial market over the world. As
many times it is stated that the UK is the most severely impacted in housing market. Many
property forecasters reviewed the past growth in housing market of UK and mentioned that
the house prices rising trend was on shaky ground. Between winter of the year 2000 and
December 2007 the average house prices in the UK increased by £99,892 according to the
Nationwide. To illustrate the rise in housing prices on UK housing market before the credit
crunch, following data and figure will be more fruitful.

44
Figure 18: Nationwide Average House prices of UK, 2000-2007
Source: Nationwide
Figure 18 shows how the house prices were keep increasing up to 2007. According to
Nationwide the house prices in 2000 was just only £82,188 and it became £182,080 at the
Dec 2007.
Figure 19: Halifax Average House Prices UK, 2000-07 (Source: Halifax)

45
According to the Halifax housing price index, it is known that the house prices of UK during
the year 2000 was £85,005 and at the end of the year 2007 it rose to £196,478 with growth of
£111,473 in average house prices. The annual percentage change on following figure depicts
the fluctuating housing prices between the 2000 and 2007.
Figure 20: Annual % change in UK house prices, 2000-2007
Source: Halifax/Nationwide
The figure 20 explains the annual changes in house prices within UK in percentage.
According to Nationwide house price index, the highest change was in the year 2002 with
25.3% where Halifax highest change was in the year of 2003 with 22.4% change.
4.2.2 Lending to Individuals before Crisis
Before the crisis, the house price growth rate was at extraordinary levels which can be
mentioned by number of factors, including level of employment, constraint in supply of
housing and the interest rates as well. However, focal point of growth in housing market is
considered as the wholesale availability of credit. Total lending to consumer and the secured
lending completion along with consumer credit also exemplifies the reason to housing bubble
in UK housing

46
Figure 21: Lending to Individuals, UK
Source: Bank of England, 2000-2007
Table 3: Total lending to individuals, 2000-2007
Source: Bank of England
In December of 2000, the total lending to individual of UK grew by £ 4.4 billion with
compare to the November with growth rate of 9.0% and the secured lending was grown by £
3.3 billion to the November. The value of loans approved on that year was £10.7 billion. At
the end of the year 2003 the total lending was highest level with 13.9% with total loan
approved with value of £ 26.5 billion. It indicates that there was immense lending rate along
Year Total lending Secured Lending Consumer Credit
2000 9% 8.20% 12.50%
2001 10.90% 10.20% 14%
2002 13.60% 13.30% 15.10%
2003 13.90% 14.20% 12.40%
2004 12.80% 13% 12.10%
2005 10.20% 10.40% 9.30%
2006 10.60% 11.50% 6.20%
2007 9.30% 10.00% 5.70%

47
with loan approval and higher consumer credit availability. This means that, during the early
years of 2000s there was easy accessible loans provided by building societies and financial
institutions like banks, which clarifies that the housing market was massively increasing. In
2007, the total net lending to individuals was £9.1 billion, secured dwellings £8.6 billion and
the net consumer credit was £0.6 billion.
4.3 UK Housing Market since Credit Crunch
The hit on 2007 invited the global instability in financial market. The UK housing market is
also one of the great victims of the turmoil. The UK house prices were gone down to the
lowest level ever along with almost zero credit availability. The gap between demand and
supply amplified, the belief which is injudicious that housing prices would grow continuously
with increasing numbers of investor cogitating based on short term appreciation. The trading
of property became a characteristic of the market that means the investors were no longer
taking worry regarding securing tenants for the properties. The ultimate result was that large
size of newly built or developed houses, especially apartments within the UK were bought
from developers with purpose of renting them to earn the profit and paying back the
mortgages or loan. But, unfortunately most of them were remained unoccupied.
The downturn in to the UK housing market has been uncovered the fact extent of this
problem with large volume of newly built apartments in major cities such as Leeds,
Liverpool, Birmingham, Sheffield and Manchester were empty in the year of 2007/08.
According to NHBC statistics 44% of new homes started in the UK in the first quarter of
2007 with double percentage growth than the year 2000 (NHBC). However, after 2007 the
UK housing market became in downturn due to massive increase in its prices and other
several factors.
4.3.1 UK House Prices after Crisis
The year 2008 is the tough year for the UK housing market due to the hit by credit crunch.
Whole economy was in downturn and there was financial instability. The house prices were
kept falling down. According to Halifax Building Society, the % change in average house
prices of UK fell down to -7.9% from 9.4% in the year 2007 where Nationwide had severe
downfall to -15.9% from 4.8% change in average house prices in 2007.

48
Table 4: Average house prices comparison
Source: Halifax/ Nationwide
It can be seen from the table 4, the fluctuations of housing prices in UK housing market. In
the year 2007, the house prices were at peak level with £197,478 on Halifax and Nationwide
with £182,080 and in the year 2010, the house prices were noticeably down with compare to
in 2007 with £166,739 and £162,763 accordingly Halifax and Nationwide.
Figure 22: Nationwide Average House Prices, UK, 2007-2010
Source: Nationwide
The figure 22 depicts that the house prices in UK housing market massively fallen down in
the year of 2008 compare to 2007. According to the Nationwide data there is slightly rise in
house prices in 2009 and 2010.
Comparison of House Prices
year House Price(Halifax) House Price (Nationwide)
2000 £85,005 £82,188
2007 £196,478 £182,080
2010 £166,739 £162,763

49
Figure 23: Halifax Average House Prices, UK, 2007-2010
Source: Halifax
The Halifax building society data (figure 23) depicts that the house prices of UK was falling
down till date. In the year 2009 was severe decline in house prices with an average house
price of £162,085 but in 2010, it seems it is slowly in increasing trend.
Figure 24: Average House Prices of UK, 2000-2010
Source: Halifax/ Nationwide
The figure 24 shows that the house prices were increasing in rapid growth rate since 2000 to
2007. And then suddenly it was fallen down in year 2008 and again started to recover slowly.

50
Figure 25: Halifax Percentage change in Monthly House Prices, UK (2008-2010)
Source: Halifax
Halifax shows that the monthly change in percentage of house prices were so much
fluctuating between Jan-08 to Dec-10. The biggest percentage change was in Jan 2009 in
positive where as the highest negative percentage changes in house prices was in September
of 2010 with -3.8%
.
Figure 26: Nationwide Percentage change in monthly house prices of UK, 2008-2010
Source: Nationwide

51
The Nationwide building society states through the monthly house change in percentage that
the year 2008 was in negative changes. This means that the all price changes were in negative
value.
Figure 27: Annual change in percentage of average house prices of UK, 2007-2010
Source: Nationwide/ Halifax
The annual percentage change in housing prices at the year 2007 was 9.4% with Halifax
where Nationwide stated that there was 4.8% change but the year after the house prices were
fallen down to -15.9% of Nationwide but in 2009, it is increased. But according to Halifax
the tough period of housing market was the year 2009 with -10.5% changes in housing prices.
4.3.2 Credit availability after crisis
The UK housing market during the boom period had highest credit availability with net
lending to individuals up to 13.9% in the year 2003 and till 2007 it was up to 9.6% in
accordance to the Bank of England. After 2007, the lending came down to the 3.6 % and
most of the dwellings were not completed. The following figure will explain the scenarios
between 2008 -2011.

52
Figure 28: Net Lending to Individuals, 2008-2011. *note: 2011 is only up to August.
Source: Bank of England
According to the figure 28, in the year 2008 is comparatively low than the previous years due
to the financial chaos. But the year 2009 and 2010 seems more down in the prospect of loan
or credit availability. During the boom period most of the building society and banks were
lending in higher rate but after the crisis arose in the autumn of 2007, there was almost no
credit availability. Furthermore, in 2009 the consumer credit is down to -0.5% when
following year had 5%. But recent periods (up to Aug, 2011), is seem to be increasing.
4.4 Over Valuation of House Prices in UK housing market
It is unambiguous that not only UK housing market is undergone to crisis but whole UK
economy due to the sub-prime lending collapse. The reason behind the downturn in property
market is the house prices. There will be a question that why the prices were increased so
massively in UK housing market. The main reason for downturn in UK housing market is the
over valuation of house prices in UK.

53
Figure 29: UK house price earning ratio, 1980-2010
Making base for the figure 29, the house prices to income ratio between 1980 and 2010
along with the long term average house prices to income ratio where all individual years
compared; the ratio is around 3.3 in 1983 and 6.25 in 2007 which produces an average house
price income ratio i.e. 4.77. During the boom period of 2007, the average house price to
income ratio is 31% greater than the long term average. This statistics depicts that how much
UK house prices were over- valued. In 2008, there was lowest point in house prices with ratio
6.1 but then the market was still over-valued by 28%. The ratio kept declining till 2009 then
after again started increasing to some extent with ratio of 5 and there was over-valued market
by 4%. From the above analysis, it can be said that the UK housing prices were over- valued
in large extent. Due to such over-valuation the house prices were boomed and invited the
financial crisis with downturn of UK housing market.
4.5 Gross Mortgage Lending of UK
After the credit crisis in the housing market, the economic downturn is facing tough years for
to overcome the crisis. Santander (2011), reports that the gross mortgage lending has been
dropped by 21% in the first six months from a year ago. It indicates that the credit crisis is
still not over yet because the mortgage lending is still keeping dropping in UK housing
market.

54
Figure 30: UK Gross Mortgage Lending, 2002-2008
Source: Building Societies Association (BSA)
The data from BSA, the gross mortgage lending was increasing since 2002 with £ 220,737
and it reached £363,409 in 2007 with highest lending since 2000. In year 2008, it came down
to £257,589 with -29.12 % changes. It indicates that the mortgage lending in UK was slowed
down in 2008.
Figure 31: Gross Mortgage Lending (UK), Aug-10 to Aug 2011
Source: CML, 2011
The recent statistics available from the Council of Mortgage Lenders, the mortgage lending in
UK mortgage market is slightly increasing with compare to beginning of 2011. In February,

55
2011 the gross lending was lowest with £936,800 but in August it is increases up to
£134,000.
4.6 Trend Analysis of UK house prices
The trend analysis of UK house prices through the panel data with the help of time series
analysis is a method to predict the future house prices. According to the data available from
the two building societies i.e. Nationwide and Halifax, it is possible to draw an outline for
future house prices in UK housing market. For this, an independent variable is given as X to
calculate the trend of house prices. In other hand, the dependent variable is given as Y.
The equation is, Y= a+ bX (i.e. INTERCEPT + GRADIENT).
Table 5: Trend and De-Trend of UK house prices (figures are in £), 2000-2010
The trend of UK house prices are in increasing rate based on Nationwide and Halifax
building society. The trend of 2010 is £ 183,773 when the average house price was £162,763
according to Nationwide.

56
Figure 32: Trend Analysis of House Prices of UK, 2000-2010 (based on Nationwide and
Halifax data).
The figure depicts that the trends are in increasing rate but the house prices of UK according
to Nationwide is in lower rate with compare to the Halifax. The Halifax house prices trend is
in figure straight to the 45 degree of angle. But the Nationwide is slightly lower. It means the
house price trend is in increasing trend so far but in slow rate.
4.7 De-trend Analysis of UK house prices
De-trend analysis is all about the house prices fluctuations between series of periods with
actual figures. The house prices of UK from 2000 to 2010 can be analysed through the de-
trend analysis to understand how much the house prices were fluctuating within a decade. But
de-trend analysis doesn’t allow to analysis for future based on present and historic data.

Impact of Credit Crunch on UK Housing Market

Impact of Credit Crunch on UK Housing Market

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