The Impact of Microeconomics and Macroeconomics on the Housing Prices in the UK

The United Kingdom housing market is very volatile for many people in the UK, purchasing a house is classified by far the largest of the single economic transactions they make in their lifetime. Therefore, it is far from surprising finding a strong reaction of the public following significant fluctuations in the housing price relative to other goods and services In Ireland, such fluctuations have taken place for the last few years. At the beginning of 1994, the price that was paid by the average home buyer has risen by roughly 42% It tends to compare with an increase of only 513%, of the consumer price index during the same period.

Given the big proportion of the total economic wealth that is mainly held in the form of housing, it has raised arguments that such dramatic changes in the housing price that is relative to other goods and services tend to have a significant effect on the behavior of the consumer.

Therefore, most economists usually see developments in the field of housing market to be of significant importance to the macro economy and microeconomy studies which has been taken to be the major impacts of developments in the field of housing market, My essay will address the effects of the prices of housing as based with the microeconomic and macroeconomic elaborating with some theories Discussion The macroeconomic involves focus on the inflation and deflation that adversely affect the prices of housing to fluctuate quickly through a short period Recent studies like the one by McDonald and Stokes (2011) have come to a conclusion that the rates of interests affects the housing market where they found that excessively low nominal rates of interests were the primary reason for the crisis of the housing market and the subsequent financial crisis that occurred in 2008.

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Similarly, Harvey and Person (1991) found that the rate of the Treasury Bill, rate of unexpected inflation, and rate of interest term structure affected the real estate return.

Additionally, there is a considerable amount of evidence suggesting that the actual estate price fluctuations can have an effect on the economy as a whole. The first channel tends to be through the wealth effect. It was because owning of a meant that households do have assets in hand and can usually convert into cash when it becomes necessary. Therefore, the increased house price means that the wealth of households is as well rising. On the other hand, having increase in wealth, the people will tend being able to enjoy more consumption, and hence the economy expands. The second channel is given the name of the credit effect. It is mainly because a house may be used as a collateral when the households need to borrow loans from the banks. Hence, with the increase in the prices of house, the value of collateral tend to rise, and people receive more credit from the financial institutions.

Therefore, they tend to have more ability in consuming products. The most complex channel and the final one is through the financial derivative products that are usually secured by the housing assets. The products often act as a link between the housing market, financial market, and mortgage market together. Therefore, any changes in the prices of house will have an effect on the other two markets and hence create shocks to the economy and financial system. Thus, the market for housing is relevant to the central banks, whereby their primary objectives are in keeping the economy and price stable.

Other studies that have been used in assessing the relationship between the macroeconomy and the housing market include the Tsolacos and Brooks (1999), They employed the model of vector autoregressive in revealing the relationship between financial variables and macroeconomic and the UK property returns. Similarly, Hofmann and Goodhart examined the linkages that were there between UK prices of house, credit, macro economy and money. Both of the above UK studies came to a conclusion that inflation and interest rates affected the house prices. in finding the evidence of a similar relationship, other studies were employed like.

Scotia and Watuwa, who concentrated on the effects of financial and economic factors on the investment of real estate, unexpected inflation, the spreads of the interest rate, industrial production growth rate, the nominal rate of interest, dividends yields, and choosing property returns. They also employed the model of autoregressive in investigating the relationship that occurred between these variables for Canada. Other countries have also been studied to put it more precisely, like Chen, Chang and Leung (2011). They usually examined the dynamic returns of housing in Singapore and using the autoregressive model. Also, Iacoviello (2000) employed the autoregressive model in investigating the relationship between house price fluctuations and interest rates for Europe. Although some studies came to different conclusions, overall there appeared to be a reasonably close link between macroeconomic and housing market.