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In September 2006, at $64.55, Oil prices fell to their lowest level since the end of March. Hence all these expansionary and positive happenings meant a watershed year for consumption expenditure. In December 2006, the pound surged against the dollar. Sterling was at its highest level since Black Wednesday meant increased purchasing power and increased consumption.

UK Housing Industry

We have selected the UK housing industry to facilitate the analysis of Consumption Expenditure in the British economy because

* Household consumption is a major part of the overall Consumption Expenditure and trends in this sector determine the changes in Consumption of households. Housing price have a significant effect on consumer confidence and expectations

* Three of the major crises and growth in the British Economy were caused due to the housing sector underlining its importance

* 78% of households are privately owned which is highest in Europe

* Housing is the biggest form of wealth in UK

* Average mortgage debt is ￡21000per person which accounts for the largest part of UK debt

In UK supply of housing is fairly inelastic this means it is unresponsive to changing prices. Small rise in demand cause a significant rise in price and also a small fall in demand will cause significant fall in prices.

Factors affect demand for housing

There are mainly two types of factors which affect demand for housing

Traditional factors

* Income: Higher economic growth and income means people can afford more mortgage and demand for house increases

* Interest rates: Higher interest rates reduce the demand and lower interest rates increase the demand for housing

* Population: Increase in population requires more housing

Less traditional factors

* Speculation: When the number of ‘buy transactions' increases investors think that demand is increasing causing a property boom. This leads to increased speculation

* Availability of mortgage: If mortgage is easily available demand will increase and prices of the houses would increase.

Over the years there has been an increase in housing prices but the prices have been volatile in the short run. If we analyse price increase in different periods there was 162% increase fin 1980-1990, 242% increase in 1980-2000, 30% increase from 1990-2000 and 201% increase in 2000-2008. There was a large difference in real price and nominal price up to 1996 but after that the difference narrowed down.

Reasons for Boom and Bust cycle in Housing

Boom and bust refers to rapid increase in price, followed by a period of falling housing prices. This has occurred on numerous occasions in UK housing. In the graph we can see that there was an increase till 1989 and decrease in 1990 after Lawson boom and again there is decrease 2008 after boom in industry. These variations in prices were caused due to a mix of interest rate, exchange rate and government policy factors.

There are two main reasons for Boom and Bust cycle in UK housing:

1. Limited supply: Whenever there is an increase in price, the supply doesn't increase correspondingly, therefore changes in demand cause volatility. The local councils restrict new property development to