Trends in house prices in London

The objective of this investigation is to determine the trend in property values in London and how they typically change. The report will focus more on the survey of the consumer who are largely investing on property mortgages. The investigation focuses on the housing market in London, which presently is recording a massive and rapid transition. The clear picture is depicted on the importance processes that will aid the market in either selling or buying homes, while considering the level of house prices changes being realistic, and likely long-term consequences of the price of houses London inflation. The paper concentrates more on the cost of homes and housing in terms of economic states in London. Based on economic term the price of houses in equilibrium is fixed by balancing the supply and demand. In the case where there is persistent respond fail to prices that are high, or where prices are determined by factors rather than the fundamental housing need, the buying desire and ability to pay, the price of houses may be considered overvalued or unaffordable. The consequences of this projected on the wages and business cost and also the increment in the risks to stability of macroeconomic. The affordability is defined as the relationship that exists between the cost of market determined of housing and the pay ability in terms of economic context. The context is not related to home affordability which lies within social rent, affordable rent and intermediate housing, where the housing needs do not meet the criteria of the market.  The house budget may be beyond the limit of some household, which critically place some of the householders to have difficulty to pay the houses and blocking them from home ownership. Inequality can also be experienced when the prices of the houses are high, and the concentration related to wealth among the home owners, across the present generation.

Consumer Sentiment

The consumer survey research since 2010 found out that the house investors in London are more comfortable in regard to the choices they made. Tabe1 shows the survey carried out

                                                 Consumer responses  to survey questions

2010

2011

2012

2013

2014

2015

2016

2017

2018

The low interest rate is aimed at ensuring many individuals become homeowners

6.9

7.1

7.0

7.0

7.0

6.8

7.0

7.2

6.9

Regret on the consumer size of mortgages

3.9

4.0

3.9

3.8

3.9

3.7

3.6

3.7

3.5

More individual are ready to own home if the prices to purchase the houses are lowered

6.5

6.7

6.7

6.9

7.0

6.9

7.0

7.1

7.1

The investment on real estate in London is good ventures to investors

7.1

7.3

7.3

7.4

7.4

7.4

7.2

7.2

7.2

The economy is expected to rise in the next 12 months if more housing are acquired through mortgages  

N/A

6.0

6.1

6.4

6.3

6.2

6.0

6.3

6.1

Mortgages are good debt to service.

N/A

7.1

7.1

7.2

7.2

7.1

7.0

7.0

6.8

Consequently, as from 2010, three queries have been raised about expectations: • previously, positive feedback have been received from a statement “Now is a good or bad time to buy a home/condominium in my community”. For the case of spring (and fall for the past year), feedbacks have fallen to neutrality. •Consumer expectations on the growth of house prices are relatively similar to prior years, however, sharp differences are recorded across the country. • Consumers are projecting an increase in interest rates. As viewed in the past, the feedback indicates a reflection of recent happenings and are not an indicator of what will happen. The survey also included people who at the moment of research did not own homes, they were asked about the reason behind not owning. The feedbacks of young Londoners (described as those aged 35 years and below) show: • Most of them mentioned lack of financial preparedness as the major reason (mostly requiring time to save for a down payment). • A small section described negative attitude towards owning a home as a reason. They described homeownership as a bad investment and stressful. Many young people are still interested in buying homes. For those between 25 to 34 years, three-quarters project and hopes to buy a home in a period not exceeding five years. The question at hand is whether they have the ability to buy the home.

• Determining factors are income, employment, confidence on their economic prospects and access to down payments. • Similarly, market conditions such as ability to find alternatives that meet their reasonable needs and wishes at an affordable cost. • Ability to obtain mortgage financing even when personal circumstances and market conditions are favorable is essential. Policies set by the federal government are making it hard for potential buyers to access mortgage financing. For those potential homeowners who are adversely affected by the federal government policies, the possible solutions involve making large down payments and potentially lowering their expectations. From the research results, 18% of potential homebuyers will fail the threshold of a stress test. For those who fail the stress test, an average of $28,750 is the required adjustment. For an estimate of 120,000 potential homebuyers, the required adjustments would be relatively small for most. On contrary, about 30,000 to 40,000 per year are estimated to undergo larger effects and would need cough out larger down payments leading to extended delays.

The primary source of source for down payments is personal savings estimated at over half of the total funds improved by funds obtained from the buyers’ RRSPs estimated at a tenth of total funds. Parents also contribute to the down payments. The impact of funds from parents is increasingly important but falls less than a fifth of total down payments. Financial institutions also play a big role by provision of loans. Obtaining down payments through borrowing has been made more difficult after the revision of mortgage lending regulations. This means that the potential buyers are required to increase the amount they put down making them less able to fulfill. This results to a lengthy period of accumulating funds hence delaying buying of the homes. A portion of first-time buyers will require help from their parents where in most cases they obtain. This insinuates that rationing will take effect in the housing market. The help obtained from parents will determine the ability of the buyers’ to purchase the homes. The income and personal prospect of the prospective buyers will eventually be less important as compared to the ability and willingness of parents to donate or lend funds to their children. The proportion of homeownership in London has reduced from 69% in 2011 to 68% in 2016 brought about by increased difficulty in saving for down payments. Increasing hurdles brought but federal government policies will top up on the ownership rate. From history, it is more advantageous to own a home in London than to rent. No concrete evidence shows that there is a change.  Hence, federal government policies on mortgages suppress home ownership and are coupling up to increase financial stress experienced by younger generation living in London (Chiquier, 2009).

Attitudes towards the Mortgage Stress Tests

A rough estimate of 100,000 Londoners have been barred from purchasing a home as a result stress testing needed by the government even if in real sense, they have the financial power to buy as per their actual circumstances. As a repercussion, few Londoners have been exposed to the effects of the stress tests hence are less knowledgeable on the same.  Prospective home owners are also expected to have some knowledge and knowhow about the potential effects. This version of our buyer study examined assumptions regarding impacts of the pressure tests. We found that around 33% (32%) of buyers would expect huge negative effects on their capacity to purchase a home in their favored neighborhood (8 to 10 on a 10-point scale). A comparative extent (29%) would expect insignificant effects (1 to 3 out of 10), and 39% expect moderate effects (4 to 7 out of 10). In any case, looking all the more barely, at individuals who are not as of now mortgage holders but rather hope to purchase in the following five years, more than one-half (54%) expect huge negative effects, and 35% expect moderate effects. Simply 11% expect immaterial effects.

The discoveries made during survey are in line with what occurred in housing markets: up to this far in the year, London’s resale market activity has reduced by 13% in comparison with the previous year and by 17% in comparison with 2016. This decrease is caused by modest rises in interest rates levied on mortgages and to provincial government policies aimed at discouraging non-residents from owning homes. The primary cause of slowdown is the increased difficulty in obtaining mortgage financing.

Housing Market Trends

There are various proportions of house costs, which can offer ascent to various evaluations of the dimension of house costs and how they are changing after some time. These reflect contrasts in the hidden information and procedures for their accumulation. There are two 'official' proportions of house value levels in the UK:

1) The Office for National Statistics (ONS) house price data: In light of an agent test of broad home mortgage loaning through the Regulated Mortgage Survey of the Council of Mortgage Lenders18.

2) Land Registry price paid data: In light of a total enlist of every single private deal at full market value19 in England and Wales. Different datasets are likewise created by Nationwide and Halifax dependent on their own home loan endorsements, regardless of whether these outcome in real buys. Moreover, correlation sites, for example, Rightmove.com and Zoopla deliver proportions of promoted asking costs and evaluated costs separately, while the Royal Institution of Chartered Surveyors (RICS) produces a main estimation pointer of conditions in the UK private deals markets, in view of new purchaser enquiries. Main estimation pointers can be utilized to foretell the expected trends in the market. This is on the grounds that they defeat the time slacks related with the property pursuit and offer process, having a home loan endorsed, an exchange finished and enlisted with the Land Registry20. In any case, since they depend on an agent test or thorough enroll of real house deals, the two authority information sources give an increasingly solid proportion of the normal cost of house deals at a specific point in time. Land Registry information is an especially rich wellspring of information on the 'going market sector rate' of lodging at a given time as it can likewise give data at borough level. It likewise incorporates exchanges dependent on money buys and additionally those sponsored by home loan back, while the ONS information just catches buys financed by UK mortgages21. ONS information rather profits by a more extravagant time arrangement, giving information on house costs by UK region back to 1969. The Land Registry information, however accessible at an increasingly definite dimension, goes back just to the extent 1996. Since house value changes after some time might be influenced by the quality and attributes of the supply of housing accessible for procurement, the ONS, Land Registry, Nationwide and Halifax each deliver their very own House Price Index (HPI). The variations in the index contrasted with a year sooner is utilized to tell whether costs are rising or falling. House prices indices tend to disengage fluctuations in prices from changes in in the blend of houses sold within certain time periods. No material is able to take liability for fluctuations in the quality of house stock brought about by improvements or decline in homes. The ONS, Nationwide and Halifax HPIs adjust for the changing mix of properties made available in any given period (in terms of size, number of bedrooms and a range of other characteristics) to measure the price of an ‘average house’22. The corresponding Land Registry HPI is instead a form of ‘repeat sales regression’ index which insinuates that it offers the measurement of average price fluctuation in repeat purchases on similar properties. Hence, it regulates the differences in the properties of each house that is resold. These records are especially applicable to understanding the incentive to those holding property at a specific minute in time, and the estimation of the lodging stock that might be accessible available to be purchased later on. While there are a scope of sources accessible, the Land Registry information gives the most precise picture of costs paid in the lodging market. In any case, in spite of the fact that it is less extensive in its inclusion of exchanges and ostensibly less thorough in its blend change as a result23, the ONS HPI goes about as a valuable measure at the genuine cost of house deals for every UK area over longer timeframes. The option datasets depend on promoted, rather than the acknowledged cost of property exchanges. The following segment sets out the ongoing patterns in London house costs, and places these with regards to the national picture and past financial cycles (Taylor, 2007).

Table 2: Median house prices and house price trends in London, England and Wales, 1996-2014

Median house prices, pounds

Compound growth rate, %

1996

2007

2009

2014

1996-2007

2007-2009

2009-2014

England and Wales

57,000

176,000

169,000

192,000

11

-2

3

London

77,000

265,000

250,000

364,000

12

-3

8

Inner London

87,000

313,000

323,000

462,000

12

2

7

Outer London

74,000

249,000

235,000

315,000

12

-3

6

The figures represented in table 1 potrays a large variation across various parts of London. In 2014, the going market rate was high in central boroughs with a relative high price of £857,000 and £1,198,000 in Westminster and Kensington respectively as per the records provided by Land Registry. In Barking and Dagenham, the mean price for purchasing a house was £215,000 in 2014. It however recorded £192,000 as the median which was larger than the national mean for England and wales.

Graph price against the years

Differential Equation for Loan Repayment

Where:

 P(t) – present value of the principal of the loan,

r – Interest rate for the compounding period

M - the payment that we would make during the same compounding period.

Pay attention to the units used. Ensure that the units are the same for all variables.

The units are a bit confusing since the interest rate is mostly calculated in a monthly basis though not always but it can be given in annual terms. Complexity grows when we think of adjustable rate loans where they are not constant that is, they fluctuate from time to time.

The equation is readjusted as follows

We then separate out the homogeneous form

Solution

Normally, we solve by finding a function which offers a solution to (3). After that we format it so that it relates to the actual inhomogeneous solution. In technical subjects, we start with a "trial solution". In other terms, we create a replica of the possible to the equation. In this instance, an exponential function is the preferred choice. 

A and C are constants. They are used as adjustments to tune up the solution until it works. By taking the derivative of this solution then substitute in (3), we obtain

  ………………………………….(5)

And are supposed to satisfy the equation. K is the interest rate. Substituting into (2) we find

 ………………….(6)

It results to general solution which is true for all loans with fixed payments and interest rates.

Taking  as the initial amount borrowed, we get

  ………………………..(7)

Assuming that we know  , 2 variables are still unknown. If we know the life of the loan as . Applying we obtain;

 …………………(8)

Substituting (8) into (7);

 ……………………………….(9)

Where

Given an investment of £400,000 over the period of 25 year loan, we can apply the method of differential equations to determine the changing interest rates for the mortgage payment. The differential equation is given as follows;

   dP(t)/dt= r.P(t)-M……………………(1)

Where,

              P(t)-is the present value of investment

              r-is the investment rate for the compounding period

             M-is the payment that we would make during the compounding period

Here we are interested with numerical calculations using the given values.

Thus equation (1) becomes;

d/dt(400,000)=400,000r-M……………..(2)

Equation (1) can be given in homogenous form as;

dP(t)/dt- r.P(t)=0  becomes; d/dt(400,000)- 400,000r=0…….(3)

Taking A and C to be any two constants, we can generate a replica of the possible solution as;

P(t)=A.ekt+C which becomes; 400,000= A.ekt+C…………….(4)

The fact that k=r and C=0  implies that k is the interest rate.

Now, from (2),

d/dt(400,000)- 400,000r=M , and M=-400,000r……………..(5)

Also , C=M/r=M/k……………..(6)

From (5) and (6); C=-400,000.

Now at t=0, P(0)=A+M/k=A-400,000; implying that A=P(0)+400,000……..(7)

Taking the loan period to be T, we have;

A=-M/r.e-rT =400,000 e-rT ,where P(t=T)=0…………………….(8)

Substituting (8) and (7);

400,000=-400,000(1-e-r(T-t))

Now, -400,000r ={ P(0)+400,000-400,000}/1-e-rT……………………..(9)

Since we have P(0)=400,000 and T=25, we substitute and find that r=∞

This means that from t=0 to t=25, the changing interest rate for the mortgage payment is continuously increasing (approaches infinity).

Besides the differential equation, Excel was used to predict the changing rates. The values of housing prices in the UK from 2010 to 2018 were used to predict the investment value of £400,000 in a period of 25 years.

 Table 3: Value of investment and changing rates from 2018 to 2043

Year

Value of Investment

Changing in rates

Year

Value of Investment

Changing in rates

2018

400000

0.032228

2031

672421.9

0.031656

2019

398483.2

-0.00379

2032

694611.2

0.032999

2020

417292.9

0.047203

2033

716939.3

0.032145

2021

449981.1

0.078334

2034

739168.4

0.031006

2022

472391.6

0.049803

2035

761953.6

0.030825

2023

495777.5

0.049505

2036

784325

0.029361

2024

518411.7

0.045654

2037

806553.6

0.028341

2025

538972.9

0.039662

2038

828354.4

0.02703

2026

561047.1

0.040956

2039

850660.1

0.026928

2027

581958.5

0.037272

2040

873212.6

0.026512

2028

603853.4

0.037623

2041

895520.3

0.025547

2029

629077.5

0.041772

2042

917790.2

0.024868

2030

651788.8

0.036103

2043

940037.8

0.02424

Figure 1: Graphical representation of the value of investment over a period of 25 years

Conclusion

            Houses in London are sold at high prices and it consistently increasing with time. The increase in demand of houses is measured by the rise in population growth and high income earned. Prices of houses across London are relatively high and continue to rise over the years. This trend is also observed elsewhere across the economy. The issue at hand is whether the houses are overvalued. Increase in population brought by employment opportunities and amenities in London as well as higher wages describes the increased demand for housing. This demand is however boosted further with greater financial liberalization and low interest rates on loans. The proof demonstrates that while income is progressively detached from house costs, this reasonableness hole needs to date been continued by a mix of tattered, open home loan credit and expanding exchanges of riches among loved ones to meet the expenses of high deposit needs. The results of loan credit is increased households with loan accruing interest rates and at times fluctuations in rates. This can result to inability of the economy to sustain further shocks. Making the regulations for mortgage tighter and increase in its interest rate may result to a decrease in the demand of housing and gradual decrease in their prices. As far as social reasonableness, the high rates of stores and considerable hole among costs and earnings has constrained access to home proprietorship for those without plan of action to elective financing sources. Proof on the adjustments in London's housing supply in light of house cost signals recommends that before, increments in the housing stock were more in accordance with the rates of development in London's population and number of family units and that these matched with a time of increasingly moderate house cost increments. Since 1999, in any case, during a period of quickly expanding house prices, housing supply has not kept pace with the interest for housing in London. In this regard, further measures to beat requirements in housing supply can be viewed as an essential advance to address reasonableness in London's housing market.

References

Chiquier, L., & Lea, M. (Eds.). (2009). Housing finance policy in emerging markets. The World Bank.

Market, H., Policy, H., & Chang, C. O. (2008). Housing finance.

Taylor, J. B. (2007). Housing and monetary policy

(No. w13682). National Bureau of Economic Research.