Latest trends in the UK property market
Over the last year, the property market in UK has slowed down due to the uncertainty associated with Brexit. The average increase in housing price is by 10.2% in 2021 and marking the highest annual growth rate in the country. The average price growth of housing has accelerated in the latter half of 2020 and the buyers have reassessed their preferences to buy house due to pandemic. Values of property have been pushed higher due to the fact that people are seeking accommodation to the change in lifestyle and spending more time working from home (Byrne 2020). There has been a steady rise in the cost of borrowing and the number of approved mortgages to buy a home remained high and it is nearly 10% higher than the pre pandemic level. In the current scenario, there has been the biggest mis match between the demand and supply of the properties and making the property market entering the season of spring selling (Mulheirn 2019). Also, the long-term economic impact of the war in Ukraine is expected to impact the property market.
When the rate of interest is low, it is attractive to buy a house instead of renting because buying a house would provide better rate of return. In order to decide on buying a house, the purchase looks at the mortgage interest payments and the rental income. The rate of interest in UK have fallen since 1992 from 15% to 0.5%, making the mortgage cost much lower. lower interest rate has kept buying the house affordable despite rising house price. A key factor in elevating the housing price have been the low interest rate era (Ons.gov.uk 2022).
(Source: Ons.gov.uk 2022)
Renting cost have also increased faster than income and in such situation, getting a mortgage to buy a house make sense when the rent paid by the individual is higher. It is true that housing price is increasing faster than renting, the economic sense lies in buying the house instead of renting. It is indicative of the fact that people are looking forward to buy themselves a house using unconventional mortgages (Hardin et al. 2018).
(Source: Ons.gov.uk 2022)
Housing price is being driven up in the country as the demand for property is outweighing the supply. Huang, Yang and Chang reported that household are being burdened due to increasing inflation, increasing rate of interest and spiralling utilities cost. The bank of England has increased the interest rate twice in the last three months and this has elevated the cost of mortgages. Mortgages have been hugely impacted due to increase in the interest rate and sub 1% mortgage rates disappearing from the market. Moreover, mortgage affordability also seems to be affected by increasing energy cost and utility cost is being accounted to assess the affordability of mortgages. Consequently, the first-time buyers with small deposits would be prohibited and cautious approach needs to be taken by the buyer (Ashraf 2020). An increase in the interest rate of 0.25% could add up to the mortgage of £324.48 each year and making good time for people to start with mortgage.
Impact of Brexit and pandemic on the UK property market
In order to fund the housing purchase by those entering the market for the first time need to take out special mortgage. In view of the current market, it is important for the buyers to be more cautious because increase in inflation is likely to trigger corresponding interest rate spikes. The monthly payment can increase significantly due to higher interest rate and for the buyer, it is the good time that they lock the competitive interest rate with a mortgage of fixed term (Chuang et al. 2018).
Buying a house in UK can be considered a feasible decision because of the record of low rate of interest on mortgages in recent years. Various fixed and variable rate of mortgages are provided by the mortgage lenders. Due to increase in housing price in recent years, the first-time buyers average age has risen. The mortgage demand in the market has been set by the new regulations and stress testing of mortgage affordability. Profile and scale of growth of house price affects the affordability of new home purchase. With the expectation that bank of England would increase the rate of interest in the upcoming days, it is advisable to apply for either capped rate mortgage, tracker mortgage and fixed rate mortgage to buy a home. Capped rate mortgage would help b setting the limit on interest rate so that even an increase in rate would not impact the borrower (Gabauer et al. 2020). With the help of tracker mortgage, a sudden hike in the rate of interest can be avoided. Apart from capped rate mortgage and tracker mortgage, fixed rate mortgage can also be a feasible solution.
A financial system comprised of network of financial institutions such as insurance companies, banks and stock exchanges that coordinate together to transfer or exchange capital from one place to another. In order to ensure that the funds are smoothly transitioned between investors, borrowers and lenders, there exist various components of the financial system. Components of financial system includes financial market, financial institutions, financial instruments, financial services and currency. Development of financial sector occurs when the effect of transaction cost, enforcement, information is eased by the components of the financial system such as intermediaries, market and financial instruments. Development of financial sector goes beyond just having infrastructure and financial intermediaries in place (Muhoza 2019).
The empirical and theorical research have widely recognized the financial intermediation importance in the economic growth. It is because the main drivers of the growth such as total factor productivity and capital can be stimulated by the intermediaries. The transaction cost of capital accumulation and total factor productivity is enhanced with the help of financial intermediaries by investing in the productive projects and monitoring then in the cost-efficient manner. When the financial system is efficient, the transaction cost decreases and investment efficiency increases because of the financial intermediary’s role. Diversification by the developed financial intermediaries helps in the mitigation of risk by distributing the risks between investors. The quality of financial intermediation is reflected by the different aspects of the financial system such as efficiency, access and stability. In order to deliver the benefits, financial access should be accompanied with higher level of efficiency such as competitive interest rate and reliable payment services. Financial intermediaries’ efficiency is reflected by return on assets and low interest rate margin. With the intention of adding value to the production so that the economic growth is facilitated, cost efficient intermediary services should be provided by the financial instruments. Economic growth is supported by the financial system to the extent that the monitoring cost is lower than the efficiency gains in production. The monitoring function of the financial intermediaries might be discouraged due to higher efficiency and this result in economic downturn. When the countries reach the level of higher efficiency, any further increase in the financial intermediaries’ efficiency seems to be ineffective in contributing economic development (Corbet 2020).
Tips for buying a house in the current market
It is implicitly assumed that financial market operates smoothly, giving little consideration to the asymmetric pay off and imperfect information. Resource allocation by the financial market have never been socially optimal because of the problems related to the asymmetry of information between lenders and borrowers making financial intermediaries incapable to monitor and screen the loans ineffectively. Depending upon the information related to the pandemic, it has been found that the financial market presents asymmetry dependence and there existed significant effect of information asymmetry implying increased volatility due to negative shocks. Mateev, Tariq and Sahyouni reported a direct link between the herd formation amongst the participants of the market and pandemic in the global financial market was established. Prices of security has driven away from the equilibrium due to the herding behaviour supported by fundamental factors. The corporate stock return has been harmed due to the pandemic as suggested by few studies. Also, asymmetric information is negatively associated with the private information that appears on the trading flows of foreign investors (Satrio 2021). However, during pandemic, asymmetric information did not play any role in explaining the change in the valuation of the firm. The imperfect information regarding the financial structure and the performance of the firms made it difficult for the firms to gain investors and stakeholder’s trust. Therefore, it is inferred from the overall discussion that the pandemic has widened the information gap and have worsened the issue of information asymmetry. Informational asymmetry leads to market impairment and in order to address the impairment, it is important that such programs should be designed that helps in reducing the asymmetry in the information. Moreover, in the time of crisis such as pandemic, emphasis should be made on making clear communication and the decision concerning operational transparency should intend to lower the information asymmetry (Corbet et al. 2020). In order to re-establish confidence in the financial sector during the crisis, central banks can play significant role by publishing the results and ordering the review of asset quality alongside taking corrective actions by the banks to raise capital and improve their asset quality.
References List:
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Corbet S, Hou Y, Hu Y, Oxley L. The influence of the COVID-19 pandemic on asset-price discovery: Testing the case of Chinese informational asymmetry. International Review of Financial Analysis. 2020 Nov 1;72:101560.
Gabauer D, Gupta R, Marfatia H, Miller SM. Estimating us housing price network connectedness: Evidence from dynamic elastic net, lasso, and ridge vector autoregressive models. Lasso, and Ridge Vector Autoregressive Models (July 26, 2020). 2020 Jul 26.
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Mateev M, Tariq MU, Sahyouni A. Competition, capital growth and risk-taking in emerging markets: Policy implications for banking sector stability during COVID-19 pandemic. PloS one. 2021 Jun 24;16(6):e0253803.
Muhoza BK. Financial intermediation and economic growth in the East African Community: A financial index approach. African Journal of Economic Review. 2019;7(2):165-82.
Mulheirn I. Tackling the UK housing crisis: is supply the answer?. UK Collaborative Centre for Housing Evidence. 2019 Aug.
SATR?O AB. Asymmetric Information and Firm Value During Pandemic Covid-19. Economics Business and Organization Research. 2021;3(1):27-43.
UK House Price Index – Office for National Statistics [Internet]. Ons.gov.uk. 2022 [cited 7 April 2022]. Available from:
https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/housepriceindex/march2021
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