The effect of inflation rate


This survey attempted at analyzing through empirical observation the effects of rising prices rate, involvement rate and unemployment on the U.K lodging market index. The methodological analysis of the research was fundamentally the multiple arrested development analysis which was utilized with Microsoft excel. The survey employs the usage of secondary quarterly clip series informations on the variables. An evaluatory analysis of the consequences obtained in this survey reveals that rising prices rate consequence and unemployment consequence on the U.K lodging market demand were found to be negative and statistically important while the involvement rate consequence was besides negative but undistinguished.


Harmonizing to the United Nations ( 1965 ) , “ … . the state of affairs of lodging is acquiring worse having to the increasing impact of its causes-population growing and even worse, urbanisation ” . The 5th session of the Unite Nations Committee on Housing Building and Planning held in Geneva in October 1967 besides reported that small general advancement had been achieved late in the field of lodging and that the cause of lodging is being downgraded ( Burns and Tjeo, 1967 ) .

The United Nations ( 1965 ) in acknowledgment of the lodging demands in development of states estimated that in order to supply for present and future needs an one-year rate of lodging building of 8 to 10 lodging units per 1,000 individuals is needed. Based on this, Adeniyi ( 1981 ) estimated that taking a really high population of U.K economic system, authorities needed to build 10,000 lodging united every twelvemonth in order to run into the present and future lodging demands of its citizens. The building of lodging in the U.K is primary a map of the private market i.e. about 90 % of urban lodging is produced by private developers ( Taylor, 2000 ) . The aim of this paper is to turn out, that economic indexs do predate the lodging industry. This paper aims to give an indicant of an economic inquiry:

( I ) Does economic index have consequence on lodging market?

( II ) How strong is the consequence of the economic variables used?


Housing issue has become a important one in the universe all over. The outgrowth of significant lodging jobs in the universe has led to widespread argument about it causes. Many economic experts that favour traditional accommodation schemes contend that pecuniary growing, originating peculiarly from the domestic bank funding of big budget shortages, involvement rate, and rising prices rate have enfeebling attempts on lodging market. By contrast, some critics of this attack contend that, unemployment is the major beginning of the lodging job in the universe.

Despite its importance, there has been surprisingly small research on the causes of lodging jobs in most states of Europe peculiarly the U.K. Thus, the comparative importance of different factors ( rising prices rate, involvement rate and unemployment rate ) as causes of lodging remains to be determined.


The purposes of this survey are:

( I ) To analyze the impact of involvement rate on the lodging market index.

( II ) To analysis strictly the impact and influence of rising prices rate on the lodging market index in the U.K.

( III ) To set up through empirical observation the consequence of unemployment degree on the lodging market index in the U.K. Therefore, it is an effort to find the function played by unemployment in bring forthing the jobs associated with lodging in the UK.


Having identified that it is the aims of this survey chiefly to analyze through empirical observation, the effects of rising prices rate, involvement rate and unemployment on lodging in the U.K, the undermentioned hypotheses have been designed to enable us transport out our empirical confirmations into the research job and are therefore subjected to empirical testing.

( I ) Does economic index have consequence on lodging market?

( II ) How strong is the consequence of the economic variables used?


The principle for this research is that ;

( I ) The research will complement bing empirical work.

( II ) The empirical analysis of the relationship between lodging market index in the U.K and macro-economic variables ( rising prices rate, involvement rate and unemployment degree ) is missing in the U.K.

( III ) The research through empirical observation distinguishes the function played by rising prices rate, involvement rate and unemployment degree on the lodging market index in the U.K.



Harmonizing to Gavin Cameron ( 2005 ) , the UK lodging market has been dining in the past few old ages, with monetary values lifting much faster than family incomes. He besides underlies the drivers of house monetary value growing, concludes that the current high ratio of monetary values to net incomes may non be sustainable, and discusses what policy steps might assist to do the market less volatile in future. After its dramatic clang in the early 1990s, the UK lodging market has staged a singular recovery. Harmonizing to the HBOS index, the mean house monetary value presently stands at about & A ; lb ; 163,000, about precisely double the & A ; lb ; 82,000 it would hold been deserving at the bend of the millenary. Research published on ( ) suggests that house monetary values have now surpassed their 1989 extremum, comparative to average household incomes. Like all markets, the lodging market is bound up in a web of establishments, and these establishments differ markedly across states. Across the universe, lodging markets divide into three chief types. In the first, exemplified by the UK, most mortgages are at variable involvement rates ( harmonizing to Council of Mortgage Lenders informations, around two tierces of all loans are presently at variable rates ) , loan-to-value ratios tend to be high ( the current average progress is around 70 per cent of the house monetary value ) and re-mortgaging is easy ( re-mortgages and farther progresss account for over half of all mortgage loaning at the minute ) . In the 2nd, exemplified by the USA, most mortgages are at fixed involvement rates, loan-to-value ratios tend to be somewhat lower, but re-mortgaging is still easy. In the 3rd, exemplified by Germany, most mortgages are at fixed rates, but loan to value ratios are low and re-mortgaging is hard. Not surprisingly, in states like Germany and Italy, a much bigger proportion of the population chooses to lease instead than purchase. An grasp of the difference between lodging markets suggests that the volatility and determiners of house monetary values will be rather different in different states.

Most theoretical accounts of house monetary values besides find strong positive effects from recent rises in house monetary values ( this is the alleged ‘bubble-builder ‘ consequence ) and that there are negative effects from high degrees of house monetary values ( the alleged ‘bubble-buster ‘ consequence ) . Taken together, these effects mean that house monetary value rises tend to construct up a impulse of their ain until finally they become merely excessively high for the prevalent economic conditions and so they fall dramatically. Of class, some states are more susceptible to bubbles than others – it is really hard for bubbles to acquire started in Germany because the market is non really sensitive to involvement rates. Most significantly though, over the long-term, the chief determiner of monetary values is household net incomes. Changes in house monetary values affect the economic system through a figure of channels. The most obvious is through their effects on families. First, a autumn in house monetary values makes families experience less affluent and so consume less. Second, a autumn in house monetary values means that families have less indirect to borrow against, and so can non finance vacations and new kitchens by re-mortgaging. Research by the OECD suggests that these effects are stronger for the UK than for any other developed economic system, with a 1 per cent autumn in UK lodging wealth being correlated with a 0.07 per cent autumn in consumer disbursement. Research besides shows that house monetary values are more volatile in the UK than across the remainder of Europe excessively.

Interest Ratess

The rate of involvement is the wages for separating with liquidness for a specified period. It is the reverse proportion between a amount of money and what can be obtained for separating with control over the money in exchange for a debt for a declared period of clip. In this sense, it is seen as a step of the unwillingness, of those who possess money to portion with their liquid control over it.

Assorted theories of involvement rates put together explain or provide variable, which determine involvement rates. These theories differ because of differences of sentiment as to whether involvement rates are pecuniary or existent phenomenon. These theories are: The classical theory of involvement, the Keynesian liquidness penchant theory of the rate of involvement, the loanable financess theory of involvement, the neo-classical theory of Pigou, the Hicksian IS-LM model and the monetarist model of Friedman ( Anyanwu, 1993 ) .

Harmonizing to the classical theory the involvement rate is determined by the intersection of the investment-demand-schedule and the saving-schedule, i.e. agenda unwraping the relation of investing and salvaging to the rate of involvement. The Keynesian liquidness penchant theory of the rate of involvement postulates that the rate of involvement is determined by the intersection of the supply-schedule of money ( possibly involvement inelastic, if strictly fixed by the pecuniary governments ) and the demand agenda for money ( the liquidity-preference agenda ) . The loanable financess theory of Dennis H. Robertson, the rate of involvement is determined by the intersection of the demand agenda for loanable financess with the supply-schedule. Here the supply-schedule is compounded or composed economy ( in the Robertsonian sense voluntary nest eggs ) plus net add-ons to loanable financess from new money ( Ms ) and the dishoarding of idle balance ( DH ) . In the Pigouvian idiom, involvement rate is determined by the intersection of the demand-schedule for money with the supply-schedule of nest eggs. Here the relevant supply-schedule is conceived in footings of salvaging out of current income, i.e. , the surplus of entire income received over income received for services in supplying for ingestion. The Keynesian and the neo-classical propositions, taken together provide us with a theory of the involvement rate of J.R. Hicks. From liquidness penchant agenda at assorted income degrees. These together with the supply of money fixed by the pecuniary governments, give us the Hicksian LM-curve, which tells us what the assorted rates of involvement will be ( given the measure of money and the household of liquidness penchant curves ) at different degrees of income.


Inflation is a sustained addition in the mean monetary value of all goods and services produced in an economic system. Different theories exist sing what causes rising prices. Different theories exist sing what causes rising prices. The Keynesian school of economic sciences asserts that rising prices is the consequence of the market forces of supply and demand causation alterations in monetary values. Higher demand for goods and services consequences in “ demand -pull ” rising prices. That is, more employees and higher incomes lead to more to outgos and more demand for goods and services. Different theories exist sing what causes rising prices. The Keynesian school of economic sciences asserts that rising prices is the consequence of the market forces of supply and demand causation alterations in monetary values. Higher demand for goods and services consequences in “ demand -pull ” rising prices. That is, more employees and higher incomes lead to more to outgos and more demand for goods and services. On the supply side, higher cost of supplies and services consequence in higher merchandise monetary values, taking to “ cost-push ” rising prices. For case, when the cost of bricks rises, edifices cost more to build. A combination of cost-push rising prices can ensue in reinforced -in rising prices or a price- pay spiral. In this scenario, higher rewards lead to higher monetary values of goods and services which in bend lead workers to demand wage rises. In the Keynesian position, money supply does non play a cardinal function in doing rising prices. Inflation is determined by aggregative demand measured in footings of gross domestic merchandise ( GDP ) . Money supply is merely one of many determiners of aggregative demand. The Keynesian school besides proposed the construct of optimum degree of production, known as possible sum end product or natural GDP. This is the highest degree of GDP an economic system can bring forth without adding to rising prices force per unit areas. The degree of GDP in any period may be higher or lower than possible GDP, and the difference is known as the end product spread. Another theory, the pecuniary school of economic sciences rising prices, says rising prices is caused by an addition by an addition in the measure of money in circulation relation to the supply of goods and services. As the late Milton Friedman, a Nobel Prize- winning economic expert, stated, “ rising prices is ever and everyplace a pecuniary phenomenon ” .

This literature identifies a figure of theories of rising prices, viz: demand-pull, cost-push, structural, pecuniary, and imported rising prices. The demand -pull paradigm opines that demand-pull rising prices occurs when aggregative demand for goods and service is greater than the aggregative supply such that the attendant extra demand can non be satisfied by running down on bing stocks, deviating supplies from the export market or the postponing demand. The cost-pull school opines that rising prices arises from additions in the cost of the factors of production, particularly lifting rewards emanating from trade brotherhood activities -embodying besides a ‘socio-political position ‘ ( Addison et al, 1980, 1981 and Cobham, 1981 ) . The stucturalists explain the long -run inflationary tendency in developing states in footings of certain structural rigidnesss ; market imperfectnesss and societal tensenesss in those states -relative inelasticity of the nutrient supply, foreign -exchange restraint, protective steps, rise in the demand for nutrient, autumn in export net incomes, get oning import permutation industrialisation, political instability, etc. Monetarists opine that rising prices is ever and everyplace a pecuniary phenomenon: ( Friedman, 1966, p.18 ) hence monetary values tend to lift when the rate of addition in money supply is greater than the rate of addition in existent end product of goods and services ( Johnson, 1973 ) . On the other manus, imported rising prices arises from international trade whereby rising prices is transmitted from one state to another and this is more so during a period of lifting monetary values all over the universe ( Harberger, 1978 ) .


It is by and large agreed that unemployment like rising prices, is a symptom of basic economic unwellness or macroeconomic disequilibrium. What is, nevertheless, controversial is the “ appropriate ” conceptualisation of the topic. During the early yearss of the development of unemployment theory, much contention over the definition and beginnings of unemployment revolved around the differentiation between “ voluntary ” and “ nonvoluntary ” . unemployment. Even the conceptualisation of these classs has been a beginning of contention. Nevertheless, voluntary unemployment is said to be when individuals choose non to work or accept occupation for which they are qualified at the traveling pay rate and conditions likely because they have agencies of support other than employment. On the other manus, nonvoluntary unemployment exists when individuals can non obtain work even if they are willing to accept lower existent rewards or poorer conditions than likewise qualified workers who are presently in employment. Despite the troubles of measuring and norm-setting the above categorization, the taxonomy of unemployment includes a status ( being out of work ) , an activity, ( seeking for work ) , an attitude ( wanting a occupation under certain conditions ) , and a demand ( necessitating a occupation ) ( Levine, 1957 ) .

Unemployment may be classified into two basic classs: Unemployment that consequences from lacking aggregative demand and all other unemployment due to clashs and labour market ( mal ) accommodations. The latter in bend is frequently divided into frictional, structural, seasonal, real-wage, technological cyclical, unemployment. Deficient demand unemployment occurs when there is non adequate aggregative demand to bring forth work for the whole labor force no affair how it is trained or deployed. Frictional or search unemployment arises because it takes clip and resources for workers to alter occupations, either voluntarily or involuntarily, even though suited occupation vacancies exist and can be found without the worker holding to set his wide occupational position or his reserve pay. Therefore, fractional unemployment is usually viewed as that sum of unemployment that corresponds to ( unfilled ) discrepancy of normal unemployment -hard-core unemployment ( irreducible minimal value ) being the long-run discrepancy. Structural unemployment, on the other manus, exists when there is a mismatching between the unemployed and the available occupations in footings of geographic location, required accomplishments or any other relevant dimension. Seasonal unemployment is seen as unemployment due to the bing excessively high degree of existent rewards. Technological unemployment, technological unemployment arises when machines replace work forces in the production procedure. This is a regular characteristic of technologically advanced states of Europe and America. Cyclical unemployment nevertheless, is traditionally associated with the trade rhythm, particularly recession and depression. This explains why some experts classify it as a discrepancy of deficient-demand unemployment ( see Anyanwu, 1985 and 1991 ) .



The relationship between the dependant and explanatory variables is examined in this survey utilizing arrested development analysis. Arrested development analysis shows how the typical value dependant variable alterations when any one of the independent variables is varied, while the other independent variables are held fixed. A arrested development analysis aims to happen a relationship between the dependant variable ( house monetary value ) and the independent variables ( rising prices, unemployment and involvement rates ) which are possible forecasters of such. This normally used statistical tool determines if there is a correlativity between the variables and if so, the nature of their correlativity.

Y= & A ; szlig ; 0+ & A ; szlig ; 1X1+ & A ; szlig ; 2X2+ & A ; szlig ; 3X3+µ

Therefore the estimated arrested development equation is therefore:

Y= & A ; szlig ; 0+ & A ; szlig ; 1X1+ & A ; szlig ; 2X2+ & A ; szlig ; 3X3

Where µ is the error term that assumed normal distribution ( µ?N ( 0, s ) ) with mean, 0 and standard divergence, s.

The consequence is a arrested development equation shown above, which is a numerical equation that defines how dependent variables are predicted by independent variables. The arrested development besides gives indexs on how good or hapless the theoretical account is in foretelling the dependant variable. Therefore we set the hypothesis

H0: & A ; szlig ; 1= & A ; szlig ; 2= & A ; szlig ; 3=0

H1: & A ; szlig ; 1? & A ; szlig ; 2? & A ; szlig ; 3? 0

If the p-value is below 0.05 for each variable, so those independent variables are correlated to the dependant variable.

The multiple arrested development correlativity coefficient, R2,

RY.X1X2X32= ( Y-Y ) 2 ( Y-Y ) 2

is a step of the proportion of variableness explained by the arrested development relationship theoretical account or the arrested development equation. Approximately, this means the R2 is the per centum at which the theoretical account explains the alterations in the dependant variable based on the independent variables. Last, the standard divergence is the scope at which there is +/- mistake with a 95 % assurance degree.


The survey employs the usage of secondary informations. In other words one-year clip series informations on rising prices rate, involvement rate, unemployment and the lodging market index were all obtained from secondary beginnings including the International Monetary Fund ‘s International Financial Statistics Cadmium and from Office of National Statistics.


Following the theoretical account specification presented and using quarterly clip series informations on lodging market, rising prices rate, involvement rate and unemployment every bit obtained from secondary beginnings. The consequences obtained after running the information through Microsoft Excel 2007 are as follows:

The estimated arrested development theoretical account becomes ;

The value of R ( Correlation coefficient ) obtained for our informations is 0.80 which lies between 0 and 1 bespeaking a positive relationship between lodging market index and the selected macroeconomic variable ( Inflation, involvement rates and unemployment ) .

Its is of import to observe that out of all the possible economic indexs that affect lodging monetary values, the 1 that will explicate 64 % of the alterations in existent estate monetary values comes from rising prices, unemployment and involvement rate. Inflation rates and unemployment rates are negatively correlated while involvement rates are positively correlated. Researching each variables in more inside informations:

Inflation rates

The p-value suggests that there is a strong important relationship between rising prices and house monetary values. Inflation addition should take to diminish in house monetary values.

Unemployment rates

From the analysis, it shows that unemployment is negatively correlated but has a important relationship with house monetary values.

Interest rates

Interest rate from the analysis shows an undistinguished relationship with house monetary values. But the relationship is positively correlated.


This survey basically discusses the effects of rising prices rate, involvement rate and unemployment on lodging market in the U.K. The period of survey is 2000-2009. Using the arrested development technique, two of the variables viz. , rising prices and unemployment were found to be statistically important in finding the market behavior of lodging in the U.K, while involvement rate was found to be undistinguished. Therefore, empirical findings in the survey provides grounds in support of the economic inquiry that economic indexs do hold effects on lodging market and besides the demand for policy shapers to digest a certain rate of rising prices as a manner of hiking the lodging market index in the economic system, and besides pronouncing policies that would cut down unemployment. policy actions needs to be taken so as to better on the lodging market demand. In other words, a higher proportion of the entire fluctuations in lodging demand in the U.K is as a consequence of the fluctuations in rising prices rate, involvement rate and unemployment degree.


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