Causes for House Price Fluctuations
Many factors can affect the demand for housing, including the following:
- Price of Housing – The price of housing obviously affects the demand for housing. If prices fall people will want to buy houses, making demand go up, however, if price of housing is to go down people will be more reluctant to sell their houses as they will not be able to sell their house for as much as they may want to. If prices rise then people may not want to buy houses, making demand go down, but they may want to sell their houses, as they will increase in value.
- Income – If peoples’ incomes were to rise then they would have more money,
making them more willing to buy a new house. This would bring demand up, along with the price of housing. If incomes fall then people will not have the money to move to a more expensive house, making demand and the price for houses to go down.
- Price of Substitutes – Substitutes are alternatives to buying houses, for example
rented accommodation. If the cost of renting accommodation went down then the demand for it would rise. This would cause a fall in demand for buying houses. If the price of substitutes went up, then the demand for housing would rise; as people would be more inclined to buy a house rather than rent it. At the moment it seems that the price of rented accommodation is going down, while the price of housing is clearly going up. In the future this may cause house prices to crash, as demand for houses would go down.
- Price of Compliments – Compliments are assets that would be bought along side
the purchase of a house, for example, a mortgage. If the cost of mortgages went up then this may cause the demand for housing to go down as people would not want to move house and therefore get a new mortgage that would cost them more. If the cost of mortgages went down then people would want to move house and take out new mortgages to save them money.
Many factors can affect the supply of housing, including the following:
- The Profit in Building Houses Compared to the Other Activities – If there is more
profit for builders in building flats then more flats are likely to be built, bringing the supply of housing down. If it is more expensive to build flats then more houses will be built than flats, so this will cause supply of housing to go up.
- Other Uses of the Land – If there is more profit and better causes in using land for
other purposes, for example, farming then the supply of housing will go down. There is a limited amount of land in the UK and this must not only be used for housing. Large amounts of land are used in the UK for farming, and this uses up potential areas for housing developments.
- How Easy It is To Build Houses – If people demand larger houses then it will be more difficult to give the public what it wants. If houses are bigger then there will be less time to build smaller houses. This will affect the demand for labour, as more builders will be needed. With few builders supply will go down, as enough houses cannot be built.
