Many people took out very large mortgages. In 1983, the average new mortgage was approximately 2.1 times annual average earnings. By 1989 this had risen to 3.4 times annual average earnings.
House prices were rising uncontrollably and bringing considerable inflationary pressures to bear within the economy. As a result, the government increased rates and reduced government assistance to home ownership. The impact of these measures plus a worsening economic environment drove house prices down and the housing market into a state of recession (Williams and Holmans, 1996).
In mid 1989 house prices started a downward trend for the next six years, falling by 12 per cent, before reaching a trough in July 1995.In the years 1990 - 1995 house prices fell by around 12.2%. Many people found themselves in a position of having negative equity on their property because the value of the mortgage now exceeded the property value. This meant many people were unable to move house without taking a loss.
Then, in 1996, house prices began to rise again. The UK housing market started to recover with a 7 per cent increase in prices. The low interest rates enjoyed by UK homeowners have reduced mortgage payments as a proportion of gross earnings for the average purchaser from 22 per cent to just 15 per cent. Consequently, mortgage payments account for a smaller share of income than at almost anytime since 1983 and are well below the 36 per cent peak in 1990.
Since May 1997, house prices have been on a steady rise. Many factors have contributed to this increase including growing population, rising employment, increasing number of households, limited supply of new housing properties and the emergence of alternatives like buy-to-let. Another important reason is the increase in popularity of real estate as an investment avenue. Fall in the level of confidence in traditional investments and increase in speculative avenues has contributed immensely to this.
The fall in long-term real interest rates - the gap between inflation and interest rates on government bonds - has helped support property investments. The most complimenting factor, however, has been the short-term interest rate set by the Bank.
The sharp fall in prices at the end of 1980s and early 1990s pushed the interest rates to very low levels in relation to rents and other assets and incomes. This, combined with the realization that lower interest rates were meant to stay, created a strong and steady rise.
By 2001, though house prices were still below their long-term trend, the boom had begun to fade. Further to this, there followed a series of global events that ruptured the boom even further. In response to the bursting of the dotcom bubble, September 11 and the start of the Iraq war, the Bank cut rates, taking them all the way down to 3.5% during 2003.
Then, however, the Bank switched into tightening mode, raising Bank rate five times between November 2003 and August 2004. The results of this on the housing market were significant, producing the famous 2004-5 pause in prices.
Determination of equilibrium price and quantity
The determination of price depends on the type of market organization the product belongs to. In a competitive market, the point of intersection of market demand and supply curves determines the