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Research ProjectThe UK Housing Market - Factors Influencing the Housing Market: Mortgages
Image: The housing boom of the mid eighties eventually led to a collapse in house prices and misery for thousands of house owners. Could it happen again? Copyright: Anthony J. Crowley, stock.xchng Let's now take a closer look at some of the key factors influencing the market for housing. Arguably one of the most important of these factors is the ability of people to be able to buy houses. This, in turn, is reflected in data about mortgages. For most people, the money needed to buy a house is not something they get from their savings. The large sums involved mean that a loan has to be taken out to buy the property - a loan for the purchase of a property is called a mortgage. Prior to the 1980s, mortgages were supplied primarily by building societies. Building societies were financial institutions owned by the members who saved with them. They were not profit making bodies but used the funds generated to re-invest into mortgage lending. The route to buying a house therefore depended, to some extent, on having an account with a building society and having saved for some years to build up a deposit on a future purchase. In many respects the demand for housing was rationed - demand for mortgages was greater than supply - but these mutual societies rationed out who would get the mortgages. The de-regulation of the financial services industry in the 1980s meant that many building societies now had to compete with banks and other financial groups who were offering mortgage services. Some of these mutual societies de-mutualised (became PLCs) and effectively became banks - Halifax and Abbey being two such examples. This had the effect of increasing competition in the industry. Firms now offered mortgages more freely and as a result the demand for owner occupied property increased. In addition to this, Mrs Thatcher's Government announced plans to sell off the local authority housing stock (council houses). Tenants were given the right to buy their properties in many cases at much less than their market value. Such a scheme was dependent on the amount of years the tenant had lived in the property at the time of purchase. What this meant was a significant change to the housing market. As the demand for housing grew, prices rose. As prices rose, the newly regulated financial services industry was able to take advantage of its freedoms by offering house owners the opportunity of making use of the equity in their homes to borrow for other purposes like holidays, cars and so on. 
The housing market can have you in the palm of its hand! © iStock.com Negative EquityHaving equity in your home means that the amount you owe on the mortgage may be £100,000 but the house is valued at £175,000. There is £75,000 worth of equity in the property which could be borrowed using the property as security for the loan. The home owner was effectively using the value of their property to borrow money. When interest rates rose to nearly 16% in the late 1980s, to try to bring inflation back under control, the housing market collapsed. Prices fell and many people were left with a property worth less than their mortgage (negative equity). As unemployment rose, people defaulted on their mortgage payments and were forced out of their homes or had to sell leaving them in debt. This was a very difficult lesson in basic economics for many people. Since the mid-1990s, the housing market has once again picked up. As demand has grown prices have once again risen. There has been much talk of the prospect of another crash but to date this does not seem to have materialised. Task 6Look at the chart below: Number of Loans for House Purchases (000s)
Data source: Council of Mortgage Lenders
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