Microeconomics
The determination of prices in local and regional housing markets is a classic example of microeconomics in action. We are seeing the interaction between buyer and seller with prices being offered and agreed before a final transaction is made. Each transaction depends on-
- The price that the seller is willing to agree for their property with the prospective buyer
- The actual price that the buyer is willing and able to pay.
Buyers place offers for a property that the seller can either accept or reject, the greater the demand, the higher prices rise.
New Builds
Because expenditures for housing construction are both large and variable, they exert a major impact on the economy. For new housing, the supply of housing stock is inelastic in both the short-term and the long-term because of the lags involved with housing construction and because the supply of land is constrained, particularly in the UK. This inelasticity of supply amplifies the impact on house prices and shifts in demand, which in-turn encourage speculation. Total housing transactions in Hull for the period 2000 - 03 were 9067 of which new build completions were 2,154, which is well above the national average. However, it is hard to see what impact new builds have had in stabilising escalating prices, Kate Baker reports; “New supply nationally only accounts for 1% of the housing stock, and so even measures which change new supply significantly would not have much effect on prices were it not for the role of expectations.”
The Effect of Interest Rates
One of the key determinants of demand for houses is the low interest rate because most people finance the buying of a house by borrowing money. Because interest payments are so large a part of mortgage payments, variations in interest rates exert a substantial effect for the demand for housing. Of course, the interest rate is not the only determinant of demand for houses. Another important factor will be the level of income that people have. The faster the level of income people earn is growing the more money they have to invest in their houses. Given theses changes individuals now have more income available to spend on housing. Against the backdrop of unresponsive housing supply, rising demand, partly resulting from changes in spending patterns, has resulted in strong house price increases.
Inflation
When banks lend too much it increases the money supply in the economy, which is inflationary. Too much lending has the same effect as if the Bank of England flooded the economy with money. The increase in the money supply will reduce the purchasing power of money and lead to rising prices, inflation. A classic indication of the money supply in the economy is house prices. When house prices are high this indicates that the quantity of money in the economy is high, which is inflationary.
The buy-to-let phenomenon
A major stimulus to the market is the continued popularity of buy-to-let as an alternative to other forms of investment. Local agents continue to report interest from southern investors, keen to capitalise on the house price growth in the region. This is creating artificial demand for property, most of which is being funded by borrowed money. Investors making speculative investments in towns are creating high prices.
Conclusion
Hull’s housing in many respects is in decline; however, evidence from this report suggests that the fluctuations in prices have been created by consumer demand. The demand has been fuelled by low interest rates, low inflation and the buy-to-let phenomenon. Supporting evidence from the Baker Review suggests that new builds have little impact in stabilising prices, which is clearly demonstrated in Hull. High property prices make homeowners feel richer and encourages equity-withdrawal, with many people speculating in the property market which in-turn fuels the property boom.
Appendix
All Existing Housing Stock
