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Sensitivity Analysis Was Performed To Test How Changes In The Underlying ...


Sensitivity analysis was performed to test how changes in the underlying economics affect changes in the percent burden. The results are summarised below:
Effect changes of economic assumptions have on the mortgage burden:
1% increase in housing index results in:
2% increase on second house


4% increase on third house

1% increase in inflation (salary) rate results in:
2% decrease on second house


4% decrease on third house

1% increase in bank rate results in:
2% increase on first house


2% increase on second house


4% increase on third house


The current economics were compared with best-case economics and worst-case economics. For the best case scenario an extreme housing price ‘crash' was assumed coupled with very strong inflation (salary increases). The worst case combined high housing price increases, high mortgage rates and paltry salary increases. These numbers are perhaps on the boundary of credibility. Naturally one cannot expect the extreme cases to be sustained for any length of time.

Curr-ent
Best case
Worst case


Housing index
4%
-5%
8%


Bank rate
4.8%
4.8%
5.8%


inflation
2.8%
3.8%
1.8%










Results for key years are tabulated below:
base rates
best case
worst case

22
29%
29%
31%

23
27%
27%
29%

24
26%
25%
28%

25
24%
24%
27%

26
23%
22%
26%

27
38%
23%
51%

28
36%
21%
49%

29
34%
20%
47%

30
54%
24%
84%

31
51%
23%
80%

32
48%
21%
77%

33
45%
20%
73%


It can be shown (Appendix 1) that once the initial burden percent is calculated the formula:
Given B= initial burden (age 22)

a similar formula holds for the burden at age 30. During the years between the peaks the curve is a basic exponential decay curve:



One would expect the economic variables not to be independent but to have mutual influences as suggested by Meen. Using the figures from Meen an increase in housing prices is associated with an increase in inflation and a decrease in bank interest rates.

Decrease
Increase
Same
Rapid increase

Housing index
-5.0%
4.0%
0%
8

Mortgage rates
5.8%
4.8%
5.8%
3.8%

Inflation (salary)
1.0%
2.8%
1.8%
3.

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