Will the Housing Bubble burst - Assignment Example

The main cause for this is demand outstripping supply, the classic Economic scenario. The easiest answer would be to increase the supply, and if we were talking about any other good, then this would be easy. But in the Housing market there are many barriers to increasing the amount of supply. Firstly, you have to find a location, one that would appeal to buyers and would be suitable to build upon. Then planning applications have to be filed, this can often take years to obtain – and can be very difficult. Then the houses have to be designed and built, which is a question of logistics and time planning – and finally buyers have to be found – although in the current climate this would not be very difficult.

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The Government has already tried this approach, and with announcements by the Deputy-Prime Minister that hundreds of thousands of new homes would be built in the South East over the coming years, you would have thought that the problems would be solved. However these proposals are facing fierce opposition. Due to years of under spending on local infrastructure, many proposed sites are unsuitable in their current state.

The Government has now realised this, and new Infrastructure projects are getting underway e.g. New A120 and A130 – which enable easy access to different parts of the region, enabling housing to be located virtually anywhere – whilst still enabling a steady supply of labour.

Currently it is estimated that for every Home on the market, there are 11 potential purchasers. The Royal Institution of Chartered Surveyors said members reporting a price increase during the three months to April outnumbered those reporting a decline by 63%, the highest margin since November 1999, most said prices has risen by between 2% and 5%.

RICS said the increases were the result of fewer suitable houses coming onto the market, with the average number of properties per surveyor falling to 60 in April from 67 in March. The evidence of higher prices was backed up by figures from Hometrack, which monitors 4,000 estate agents in England and Wales. It said prices had risen by 7.7% in the first four months of this year and by 2.6% in April.

But of course, all inflationary pressure is linked to the Interest rate and what the MPC decides is right for the economy, John Wriglesworth of Hometrack stated “If the MPC raises interest rates by 2% then I think that could cause the housing bubble to burst. If the MPC does not over-react, and if interest rates go up by a quarter or half of one percent, then I think house prices will run out of steam next year.”

But for the moment there is no sign of price increases slowing. In the RICS survey, a clear majority of surveyors are forecasting further price rises in the months ahead, with those predicting an increase outnumbering those expecting a decline by 75%, up from 71% in March. “There appears to be no end in sight to the rise in prices,” said RICS national housing spokesman Ian Perry. He said the soaring prices were making it difficult for first-time buyers to get onto the property ladder. The latest figures tally with a string of recent studies showing sustained house price growth across the whole of the UK.

Earlier this month, the Land Registry said houses in England and Wales sold for an average of nearly �122,000 during the first three months of 2002, more than 10% up on the same period last year. The country’s second-biggest mortgage lender, the Nationwide building society, said house prices rose by a record 3.4% in April. The current property boom – the biggest in over ten years – has been fuelled by high levels of employment and low interest rates, making mortgage loans cheaper.

A shortage of saleable properties, particularly in the south-east of England, has further accelerated the rate of house price inflation. RICS said the property shortage is holding back sales activity, with surveyors completing 37 sales on average during April, down from 38 in March. The organisation added that overpricing has made it difficult to sell some houses, especially in property hotspots such as London and the south-east of England.