In the UK, reliable house price information is a very high priority both for the public and private organizations due to several reasons. The private bodies and organizations use the house price information to form strategies and plan how they will conduct their business in future. The umbrella body of the UK mortgage lenders, the Council of Mortgage Lenders, for example provides house price information to its members to help them prepare for the future. The public authorities usually ask for house price trends in the long run and short run to assess the macro and micro economic policies of the country. Therefore, the UK needs the data on house prices more than other nations because housing is a major component of the general household wealth. The information helps in formulating microeconomic policies in situations where one of the highest priorities in social and economic improvement is housing. For example, the housing department’s objective is to ensure that the public have access to quality housing regardless of whether they own it or rent it, the need the house price information to achieve this goal. The house price information is used to determine how it interacts with other components of the economy.
Usually, the published figures do not indicate the average price of the mortgages stock because the estimates are drawn from calculating averages of complete mortgage applications. This means that the properties purchased along with the mortgage have not been accounted for, hence; the published figures could be wrong. That is on the basis that the publication does not show the true composition of the whole mortgage stock.
Since the mortgage industry is so large in the country, it is possible that the sample use by the housing organization in a financial year does not reflect the properties of the overall stock mix. This could be because of the mortgage industry has so many characteristics in form of individual dwellings that are located in different places.
There is also the assumption that the average pricing of housing units that were not in the market during that financial year is included in that average. However, the formula only accommodates for those housing units that are available on the market at a given time period. Hence; the average estimate of house prices will be inaccurate.
The average price of housing is found using a compilation of housing information over several years in succession. However, this information is expressed as an annual rate. This will possibly cause inaccuracy because the trends in housing prices is not uniform hence there will be no defined average price.
a. A decrease in average house price is the amount by which the mean price of mortgages reduces. It is measured by using an estimate of the mean house prices over several years in succession. The mean price is then derived from a given set of observations, whose interpretation gives a valid result. An average decrease in housing prices means that the prices of mortgages have gone down making them affordable to more people who could not afford it earlier. To find the decrease in average housing prices, we use simple average prices of housing of several years. It is given in aggregate figure.
On the other hand, decrease in house inflation price implies that there has been an annual percentage decrease in the housing prices. It is calculated just like the decrease in average price level, only that we use percentage changes rather than the aggregate change in price levels. It is usually given as a percentage.
b. A trend of increasing house price refers to a constant increment in the prices of mortgages over a long period of time, for example two decades. These trends of house price increases are used by the government to make macroeconomic policies that will determine how the economy develops. This is mostly done in economies where housing forms a large portion of the aggregate components of the national economy. On the other hand, house price volatility is the short term price changes in the pricing of mortgages, for example on an annual basis. The short term price of houses information is used by government to formulate micro economic policies while private organizations use this information to organize their strategies.
c. The annual rate of inflation refers to the real rate of inflation of housing prices in a particular year. The annual rate of inflation varies from one year to another and is not dependent on the previous year’s rate of inflation. The annualized rate of inflation refers to the average rates of annual rate of inflation over a long period of time. For example, the annualized rate of inflation could be determined by analyzing annual rates of inflation over a period of three decades.
The nominal price of houses is the price of a house at a given time. This nominal price is not in relation to anything else, it is simply the value of the house in monetary terms. Therefore, the average nominal prices of a house will be the prices of housing units over a long period of time, for example a decade, without relating these prices to anything else. Real house price is the value of a house in relation to other goods and services in the economy. Therefore, in real mean house prices, we relate the prices of housing units to the prices of other goods and services being traded in the national economy. The real mean house price is not equal to the mean nominal price of housing units.
At times, the real mean housing units’ prices reduce while the nominal housing prices increase. This is due to several reasons. First, the real mean of housing unit prices can fall because the prices of other goods and services have gone up. If the average prices of other goods and services increase at a faster rate than that of housing units, the real average price of housing will reduce. Secondly, the real housing prices can reduce because of the reduction in the average housing prices while the average prices of other goods and services remains constant. This is because there is a relationship being established between average housing unit prices and the average prices of goods and services. Therefore, the price of housing units is expressed in terms of the prices of other goods and services.
The real average house price will reduce while the nominal housing prices increase if the housing prices increase but the other goods’ and services’ prices in the economy increase by a higher margin or at a faster rate than the average price of housing.
Macro economic policies are the policies that affect the aggregate components of an economy. Aggregate component examples include; consumption, supply and production. To analyze and formulate macroeconomic policies, there is need to have the housing information on both the short term period and the long run periods. This will require assessing how the housing prices have been over the immediate past year, as well as assessing the housing prices over the last two or three decades. The macroeconomic policies usually cover the whole country; the policies are made with consideration on the whole country.
Microeconomic policy, on the other hand, are the policies affecting the small components of an economy. They include prices, demand and supply of goods and services, for example, housing. The micro economic policies are formulated inconsideration to the short term conditions in the economy, for example the current housing prices. These policies usually target solving short term economic problems. Housing price information can be used to formulate policies on the housing industry in the short run, maybe to regulate prices or increase demand. The micro economic policy can cover the whole country or individual counties or smaller units of administrations within a country.
Macro economic policies are therefore only formulated by the central government to determine the direction of the housing industry and the housing prices. Micro economic policies can be used by counties to make policies as well as the private organizations on their normal planning exercises.
Goodhart, C. A., & Hofmann, B. (2007). House Prices and the Macroeconomy: Implications for Banking and Price Stability (illustrated ed.). London: Oxford University Press.
OECD Economic Surveys: United Kingdom. (2011). OECD Economic Surveys: United Kingdom 2011 (illustrated ed.). London: OECD Publishing.
Riley, G. (2005). Housing Market Economics Digital Textbook. Bristol: Tutor2u Limited.