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Housing Market Development and Macro economy in the UK in the early 1990s

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The trends in London housing market from 1981 to 2000 show great volatility especially in England and Wales (Figure 1). The main reasons for these trends can be explained in terms of the violation of the assumption of housing markets. The financing constraints and irreversibility are given as explanations for the housing market volatility. The institutional changes in the UK especially the deregulation were obtained to have affected the housing markets through the financial markets. The deregulation affected the mortgage liquidity and increased volatility. Due to high inflation, interest rates increased and hence the financial instability affected the mortgage markets.

The main institutional changes other than the above that has resulted in the recession in the early 1990s were the entry of banks into mortgage market resulting from the removal of restrictions on banks in this regard, transition to a market based interest rate, entry of new centralized lenders, starting of mortgage securitization and the removal of restrictions on building societies(Joseph Rowntree Foundation, 2008). The inability of many borrowers to adapt to the high-interest rates together with unemployment and high personal debt levels resulted in high defaults in the early 1990s.

In addition to the institutional changes, fiscal changes like Mortgage Interest Relief at Source and changes in property council tax arrangements affected the demand for housing. The availability and the affordability of finance affected the decisions in the housing market. The different factors affecting the decisions in the housing market are classified into heterogeneity and supply constraints; uncertainty and adjustment costs; information asymmetries and transactions costs; herding effects; affordability and financing constraints(Baddeley, 2005). The tight monetary policy in the late 1980s resulted in inflationary pressures with high rise in the mortgage interest rates pushing the economy to recession and weakening of the housing market in 1990(Pain and Westaway, 1996).

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