Why are house prices in UK subect to large cyclical variations Essay

Why are house prices in UK subect to large cyclical variations (750words) - Essay Example Normally, the fluctuations in housing prices are related with economic activity. When economic activity heats up in any economy, the real estate sector start to respond to this change also by showing a tendency to adjust prices upwardly however, when the economic activity slows down the housing cycle start to show greater variations too with prices of most of the housing units started to decline. However, what is also important is the fact that numerous research studies also suggested that the increase in pricing of housing   units is also linked with the location of the housing units. The so called momentum and reversion of the cycle of housing prices is therefore not only linked with the economic activity but also with the location of the housing units.(Capozza et .al. 2002). As discussed above that one of the main reasons for increase in the cyclical patterns of housing prices is related with the economic activity therefore in order to clearly assess the cyclicality of housing prices, it is of great importance that the impact of economic activity on housing prices shall be studied first. When economic activity picks up with lesser inflationary pressures, the real income of the households increase therefore there is always a general increase in the disposable income of individuals. With the increase in income levels, the standards of life increase also and people start to prefer more luxurious housing than their current housing therefore the general increase in demand for housing units increase thus putting pressures on prices to increase. However, when the economic activity slows down and due to inflationary pressures or other economic variables, the decrease in income level put downward pressures on the prices. UKs economic performance, over the period of time, has considerably improved. UKs real GDP increased, on average, by