The London Residential Property Market

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Property prices in the United States, the US began falling in 2005 making sub-prime mortgage loans more risky as the borrowers are normally expected to exercise their options to default. Consequently, the US subprime mortgage market is suffering from foreclosures arising from falling real estate prices and borrowers exercising their options to default. (Schumer and Maloney, 2007). Investment banks such as Merrill Lynch, Goldman Sachs, and CitiGroup all fortune 500 companies have witnessed significant declines in profits, share prices and are planning to lay off workers as a result of the sub-prime crises. (Ellis, 2007). With regard to the United Kingdom UK particularly London, large empirical literature examined the determinants of the two booms experienced by home prices in the early 1970s and the 80s. Findings from these studies provide tentative evidence in support of the view that speculation on expected future house prices must have been an important force driving actual house prices (Muellbauer amp. Murphy 1997). Concerns over an ongoing house price bubble in the UK have been repeatedly raised by both the press and policymakers. Over the last thirty years, UK house prices have risen in real terms by around 2 ½ % a year and according to HM Treasury (2003) report, this stands in contrast to other European countries such as Sweden, France, and Germany where real house prices have declined or remain relatively constant. In a study conducted by HM Treasury (2003), it was postulated that low housing supply responsiveness must have contributed to a greater trend increase in real house prices here in the UK. Houses are not like ordinary commodities. This has forced up the price for houses from P1 to P2. This is because, with the present state of the UK housing market, higher demand is translated into higher prices than supply. With the government weak housing supply in the previous years, and its inability to assume responsibility to increase the number of houses, prices will continue to increase As supply becomes more elastic over time, assuming the conditions of demand remain unchanged, we expect to see downward pressure on prices and a further increase in the equilibrium quantity of houses bought and sold (Brace and Henderson (1922). Baker (2003) argues further that, whilst the property market across central London has been affected by lack of confidence, a new east-west divide emerged, with Midtown and the City faring much better than Docklands, whose dependence on the financial sector based at Canary Wharf has resulted in a greater fall in prices. Figure two above represents a very short run position. Here factors such as rapid increase immigration with the formation of a common European Union Border, cultural preferences for homeownership combined with local policies and norms have encouraged ownership such as the right to buy and the right to acquire (HMR Report 2003). In the past, owners of houses benefited from generous tax treatment. In the HRM Report (2003), Baker in this report argued that more competitive financial/ lending market resulting from liberalization, the perception of housing as a valuable asset and investment were some of the contributing factors behind higher prices and higher demand for the UK housing markets.