Tastes and fashion may play an important roll at the time. They can affect whether people buy or rent.
The cost of land will also affect the price of housing. The lower cost represents lower costs of production; this will increase profitability, so attracting more producers into the market.
The reduction in economic output of other sectors will influence the supply of housing. The relationship between economic output of other sectors and the supply of housing is that they are in composite demand. For instance, the fall in output of other sectors means that there is more available land for housing.
If one of these factors changes there will be a subsequent change in supply or demand making a new equilibrium price and quantity. In my investigation I will be looking into which of these factors (not all of them may apply to the housing market) may have changed and resulted in the rise of house prices in the UK.
Investigating House Prices
For this investigation I will take the average house prices over the past ten years, look at the change and investigate what will have caused the change in price. For this I will look into the factors of supply and demand. Also a few other factors may be:
- Interest Rates – this can affect how people save their money or how much they borrow when attaining a mortgage.
- Population – if the population has changed greatly over the past ten years there is going to be a greater demand for housing.
- Rental Prices – if it is cheaper to rent, it will be more appealing to rent therefore the prices of houses will have to come down.
- Cost of Land – if it is expensive to build houses the supply is going to be less.
- Government Building Regulations – this can affect where you can build housing, which may make it harder and cause a decrease in supply again.
Below is a table and a graph to show the average UK house price over the past ten years:
This information shows that over the past ten years the average UK house price has doubled and has risen greatly in the past 3 years. This is where I will be focusing on to see what has caused this rapid in increase in the past 3 years.
What has caused this Rise in House Prices?
Real income is the income of an individual, organization or country after taking into consideration the effects of inflation.
In this graph we can see that over the past thirty years real income has risen by over double. But over the past ten years the GDP has started to move away from household income and especially in the past 3 or 4 years household income has increased dramatically which relates to the rapid increase of house prices in the past 3 years. This could be one reason why house prices have risen. Because people have a higher income therefore more purchasing power and this may start a price shift in the market. The higher income means there will be an increase in demand and subsequently an extension of supply. In result, a new and higher equilibrium price is created.
If a household has a higher income then mortgage lenders will offer a higher mortgage equalling in that household have more purchasing power, this is to do with the mortgage-income multiple. As part of my investigation I inquired at a bank about the mortgage-income multiple. The mortgage-income multiple is where your income is times by a number around 2 or 3 giving the amount u will receive as a mortgage so consequently the higher your income, the more money you will receive as a mortgage and be able to spend on a house. Therefore again the demand for housing will increase with an extension of supply, causing a new equilibrium price and quantity.
From the Social Trends publication on www.statistics.gov.uk I can see that over the past 50 years population has grown by 17% (8.6million) this again will cause a increase in the numbers on houses needed, meaning an increase in demand and a rise in supply giving a new, higher equilibrium price and quantity. Also the distribution of the population seems to be that there is a larger number of people in the category of the age 25-34 which is the most likely age for people to start entering the property ladder and increasing the demand in this market again.
Another big factor in the rise of house prices is the price (the interest rate) and availability of credit. In the past few years interest rates have been at a low which means credit is at it’s cheapest. This will attract more people to getting mortgages, which in turn will raise the demand for houses. If people are able to obtain a cheap and easy mortgage they are likely to do so, giving them more purchasing power when buying a house. Again the more people that do this increases demand for houses that also generates an extension of supply and a new, higher equilibrium price and quantity.
The interest rate can be considered as the price of money. If you want to borrow money it is the percentage over and above the original loan that has to be paid back, meaning that you must pay the total sum plus the interest rate of the total sum every month. This makes the interest rate a vital tool of economic management. A large amount of economic activity (both consumption and investment) is done on borrowed money, and so if the interest rate is changed it will either encourage or discourage borrowing and therefore tend to increase or decrease economic growth. Looking at the graph it is clear to see that over the last 10 years interest rates have fallen from 15% to 2.5% a decrease of 12.5%. However, the decrease has not been smooth, nor has it been continual, at times interest rates have gone up and within the last 5 years interest rates have fluctuated and the decrease has been minimal, unlike in 1991 where interest rates where exceptionally high, but within a few years it fell dramatically to 5%.
Renting is a substitute for buying a house so they will affect each other. The fact that interest rates have fallen means people are going to be more interested in getting a mortgage when it’s at it’s cheapest. If there is more people interested in getting mortgages, the demand for housing will rise again causing a new, higher equilibrium price.
Over the past ten years or so government building regulations have grown tighter which makes it harder for the development of new housing. They cannot obtain land as easily to develop land so they may have to pay more or obtain land in a different area. So if it makes the cost of land rise, in turn it will make cost of production greater and the producers will have to push the price of the houses up to maintain their profit margin. Giving an overall rise in the purchasing price of new houses. Also this may have caused supply of new houses to decrease, which may affect the housing market and cause a new, higher equilibrium price. This may be because the producers can’t develop as much housing as they planned to and if there are less houses being built with a higher demand it is going to mean a higher price.
Conclusion
From my investigation I can that the all of the points made go towards a rise in price for housing, a rise in demand and a possible decrease in supply. An increase in real income, increase in population, low interest rates, increase in the price of land and tighter government building regulations all have contributed to an overall rise in the housing market. In my hypothesis I said the rise in house prices has been mainly due to the increase in real income, which appeared to be true. The rise in income relates most to how much money people will have to spend on housing and therefore cause an increase in demand for it. In the last 3 or 4 years real income has increased dramatically and in the last 3 years houses prices have risen the most suggesting that real income is one of the biggest causes of rising house prices. A subsequent extension of supply will follow this increase in demand and create a new, higher, equilibrium price.
Evaluation
Looking at the house prices over the past ten years was a good period of time because you can see how they have changed dramatically but not too far back to get confused with different periods when other factors caused the prices to rise and fall. I think my investigation went how I expected it to go. The hypothesis was fairly accurate and nothing that I found out during the investigation seemed to go against it and suggest a reason why house prices could be falling. If I were to improve my investigation I think I would look further into tastes and fashion, for example, buying to rent because I think this also is a big influence on the rising prices of houses.
Bibliography
Websites:
Textbook:
Economics for GCSE, second edition – Alain Anderton
Newspaper:
The Coydon Guardian