Explain Why the Housing Market Went from Boom to Bust and Back to Boom in the Uk?

695 Words3 Pages
Explain Why the Housing Market went from Boom to Bust and back to Boom? The long term cause of the housing market boom was caused by the increasing economic growth of the 90’s and early 00’s. GDP was increasing each year, more and more people were becoming employed and there was a lot more real disposable income. This shifted the demand curve to the right in all areas for goods and services. Especially houses in desirable areas such as London, because the “invisible hand” was moving all the lucrative workers, who had been able to make money in the boom years, to London. Consumption, as a result, increased hugely because of PPP was a lot higher in London compared to e.g. Middlesbrough. Also more importantly banks were offering better credit rates and loans became easier to obtain. This “spend now, pay later” approach crept into the housing market with the self assessment mortgages being advised to those you couldn’t afford the going rate of houses and soon became the cause of the bust. The estate agents of the early 00’s were advising to use the self assessment mortgages because it meant that the buyer could gain a higher loan by lying about their income. Asymmetric information was a part of the failure of the housing market because the estate agent knew that not all of customers would be able to pay their mortgage, but they would still get a cut of the money paid. The banks also didn’t mind because if they couldn’t afford the mortgage they could take the deposit and resell the house. This was fine at the start because people were successfully paying on time and banks weren’t losing money. The wealth effect was also increasing consumption because more people were able to buy houses. However, because of the increase of demand it caused massive inflation on the house prices. By the end people could not repay the banks and therefore the banks lost vast sums of money
Open Document