Analytical Summary of UK Economic Context

As a result of the collapse of financial systems globally it is now very difficult for first time buyers to obtain mortgages, and many who are already on the property ladder have been pushed into negative equity. A sharp decrease in the demand for home ownership in the UK, as a result of a number of factors including the inability for many to arrange credit agreements, has pushed market values down significantly. This sharp decline in market values has seen many homeowners plunge into negative equity meaning that they are unable to sell their homes without first finding the capital to cover the shortfall in their mortgage debts. Increases in the cost of living, particularly price increases in essentials such as food and utility bills, have contributed to many homeowners being able unable to keep up repayments on their mortgages; this inflation has significantly reduced the amount of disposable income that households within the UK have, meaning that less money is spent on other goods and services in the economy and unemployment rises. Subsequently financial institutions are taking measures to repossess homes to recover some of their losses and selling them on at auction for prices far below market value, an action which only serves to further decrease the market values and plunge even more people into negative equity.
Massive devaluation of the Pound against other major currencies has seen imports rise in price, including food. Seventy percent of imported food is from Europe and therefore the fall in the exchange rate with the Euro means that the price that the public pay for this food has increased accordingly. In an attempt to combat the recession the Bank Of England has cut the interest rate to 2%, to encourage spending within the economy, a move that will hopefully minimise further rises in unemployment and see a rise in disposable income levels. A consolidation of the current unemployment rate, along with a decrease in the interest repayments of many buyers, would assist with slowing down the rate of repossessions and encourage some new buyers onto the market; and as a result slow down the declining market values. The slow down of the property market has seen developers’ profits fall significantly and they are switching to shared ownership or rental markets. With some experts predicting further falls in the value of property in 2009, building for the private housing market is likely to become even less profitable.

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