London House Price Bubble, Essay Example

Introduction

A house bubble price in London is clearly visible although prediction of the exact time that it will pop is a challenge (John, 2004). Spotting a bubble in economics is a big misconception although it can be pretty on the contrary a well. So to be precise, concluding that a house price bubble in London is justified because the prices of houses are sky rocketing at rates that are practically unsustainable. Considering all available affordability measures, the prices of property have surpassed the levels that can be considered as dangerous.

The most difficult thing to predict is the length of time that the bubble will persist inflating, how the trend will reach the end and the possibility of causing a systemic financial tumult in a different place.

Main body

These are vital questions under private investigation by the financial stability team in the Bank of England. The major concern is the escalating prices of regional UK houses which are a cause of horror among important stakeholder. It I imperative to analyze the evidence (Brooks  & Katsaris, 2005).

First cause

A house bubble price in London has been attributed to financial reasons. The downward spiral of prices during recession coupled with the less generous mortgages that were given by banks restricted the ability of buying a house to only those people having substantial cash (Burton, 2003).  However, the government introduced appreciable subsidies that promoted reappearance of mortgages. This development has resulted to an increase in house purchase approved by the new mortgage. Additionally, the Bank of England reduced the interest rates on loans thus empowering individuals to borrow huge amount of money.

Second cause

The house bubble price in London can also be attributed to limitations in supply at a time that demand was soaring, slow growth of economy, low growth in population and increased new construction. All these issues led to an increase in the number of homes at a time that demand was low.

Third cause

Land shortage and tight rules of planning were also evident which meant that construction of new house was limited despite the high demand in housing created by the booming economy and spectacular growth in population. New construction had been banned in green belts that surrounded London, Cambridge and Oxford such that new suburbs could not be built.

Transition paragraph

The house bubble price in London is affected by the continuing oil prices slump as the property market with super prime value escalates thus affecting the entire property market in London. A shortage of foreign money entering UK from international sources has also contributed significantly to the house bubble price in London (John, 2003).

First effect

The house bubble price in London had an effect of escalating the prices of properties. Additionally, high profile investments in the market was distracting potential developers from engaging in affordable accommodation. To majority of people, financial shelter was provided instead of human shelter.

Second effect

The property market in London was yet another area that was significantly affected by the house bubble price in London. Potential buyers from overseas countries were identifying the safe haven investments which were dominated by prime properties market especially in the central region of London (Stone, 2007). The requirement for Bank of England to formally link the size of mortgage to the levels of income was an important issue of consideration. The house bubble price in London also led to dropping in the prices of houses below pre-crises levels thus leading to a double danger concerned with double development. A cause of concern was evident in London as it suffered from strong demand in combination with shortage of supply.

Third effect

The house bubble price in London has also resulted to the sky rocketing of prices of houses to the level of being unaffordable relative to the level of earning of a common man. Available data indicated a threefold increase in the prices of houses relative to the level of earning based on the usual “safe” level. Any further upward shift in this level can only lead to a difficult territory. The indication attributed to these figures is that the price of house has increased by eight times of an average salary of a first time buyer (Pettis, 2004).

Conclusion

The house bubble price in London has not been a good experience to go through. Majority of buyers from overseas countries have to be careful in making decisions in favor of owning some properties in London even when they can afford to pay the price. As a result, the London property is extremely expensive for buyer from Euro zone.

Bibliography

Brooks, C. & Katsaris, A., 2005. “Trading rules from forecasting the collapse of speculative bubbles for the S&P 500 composite index”. Journal of Business 78 (5): 2003–2036.

Burton, G. M., 2003. The Random Walk Guide to Investing: Ten Rules for Financial Success, New York: W. W. Norton and Company, Inc

John, C., 2004. Bubbles and how to survive them, N. Brealey.

John, R. T., 2003. The Coming Crash in the Housing Market, New York: McGraw-Hill, Inc.

Pettis, M., 2004. The Volatility Machine: Emerging Economies and the Threat of Financial Collapse. Oxford: Oxford University Press.

Stone, D., 2007. “Market Principles, Philanthropic Ideals and Public Service Values: The Public Policy Program at the Central European University”. PS: Political Science and Politics: 545–551.