A lack of new homes coming on to the market was a significant factor in the latest round of rising prices, and so prices could stabilise again if potential sellers surged into the market.
Changes
The latest figures show a continuing divergence in house price trends in reports from two of the UK's leading lenders.
The Nationwide Building Society, which published its survey for August two weeks ago, said that prices in 2009 had risen by £7,000 since the start of the year - whereas the Halifax survey suggested prices had remained at roughly the same level throughout this year.
However, both lenders still calculate the average UK home to be worth about £160,000.
Mr Ellis, at the Halifax, said that affordability of mortgages had improved for new borrowers. Typical mortgage payments for a new borrower had fallen, from a peak of 48% of average disposable earnings in September 2007 to 29% in August 2009.
However, the latest figures from the Bank of England showed that the cost of a five-year fixed-rate mortgage continued to climb during August, despite wholesale funding costs dropping.
The average interest rate on a deal for a borrower offering a 25% deposit rose from 5.68% to 5.72% in August, whereas five-year swap rates - the measure used by lenders to judge the cost of mortgages - fell from a recent peak of 3.79% on 7 August to 3.34% at the end of the month.
Future position
Tight lending criteria from mortgage providers, the state of the economy and increasing unemployment levels are leading some economists and housing professionals to predict fluctuating house prices in the coming months.
"While it is now looking very likely that April marked the trough in house prices on the Halifax measure, we suspect that they will be prone to relapses over the coming months and we very much doubt that a sharp, sustainable upward trend in house prices is in the process of developing," said Howard Archer, economist at IHS Global Insight.
David Smith, of property consultants Carter Jonas, said: "Higher interest rates, when they do come, will result in fewer buyers, which will reduce demand and once again apply downward pressure on prices. The combination of increased supply and reduced demand could catch a lot of people out in 2010."
On Thursday, one of the UK's largest housebuilders, Redrow, reported that its sales fell by 54% to £301.8m in the year to the end of June as it sold fewer homes - and those which were bought fetched lower prices.
This article shows a rise of 0.8% in the prices of houses available on the UK market, between July and August.
Price elasticity of demand (PED) is the responsiveness of quantity demand to a change in price. Factors affecting PED are availability of substitutes and type of good (need or want). In this case, there are no substitutes for the “average UK home” so all forms of housing have been accounted. Generally when a good/service has no substitutes it is inelastic, depending on its importance, because consumers have no choice. Similarly, housing is a necessity, people need a form of shelter – therefore consumers will pay extra money if there are no alternatives. Both these factors are long term because any new forms of housing will be added into the average UK home statistics. So, a house will always remain a necessity, therefore it is inelastic (shown by steep lines on graph).
One of the reasons behind the rise in prices, as the article states, was “the lack of new homes coming onto the market”. Price elasticity of supply (PES) – the responsiveness of quantity supplied to an increase in price - affects the housing industry as construction companies cannot buy land, or hire labour overnight. Furthermore, once they have all factors of production they can still encounter delays, such as weather. Therefore, PES of housing is very inelastic, which is why construction companies couldn’t build new buildings in response to a surge in demand (long process) so, supply didn’t change when demand increased causing a rise in house prices.
Before the recession (a business cycle contraction, after two consecutive quarters of negative growth in GDP), the equilibrium formed between S0 and D0 was at Q0 and P0 (≈£174,000). However, the recession caused the demand graph to shift left (to D1) due to the decrease in demand for housing because as people saved money because they were uncertain about their job stability, and less people (due to increased unemployment) had the sustainable income to pay back mortgages. This fall in demand caused prices to drop to P1 (≈£153,000). Due to the lack of demand, less people put their houses on the market in the fear of making a smaller profit or a loss and construction companies halted their residential projects. These actions caused the supply of housing (shifting supply curve to S1) to fall. Eventually prices fell so low that the houses seemed affordable (prices eventually work towards equilibrium) causing a rise in demand. Whilst this was happening, the government reduced interest rates (monetary policy – a set of official policies governing the supply of money and interest rates in an economy) in order to combat the recession, further increasing demand/affordability. This pushed demand up again to D2. However, considering that a change in supply is long term, the supply curve didn’t change. These caused prices to rise to P2 (≈£160,000). From this we can establish that a shift in demand and supply were the reasons for the 0.8% price rise.
The laws of demand state that a consumer will demand more as the prices decrease. This can be seen from this article as demand increased when the average cost of a house decreased – lower interest rates mean that the overall cost of buying a house has decreased. They also state that at a lower price more people can afford to buy the good, as corroborated by the article.
The biggest advantage of the price rise in the long run is the wealth effect – an increase in spending that accompanies an increase in perceived wealth. When consumers hear about their house value increasing, they will perceive their wealth to have increased and spend more. This will boost the economy by increasing demand, output and employment – three important factors for growth. It also gives incentive to constructors to build more homes in the hope of increased profits, thus generating even more jobs. Furthermore, increased consumption would cause demand-pull inflation (persistent increase in the average price level in the economy), which in this case is beneficial because UK has continually experienced deflation during the recession.
However, a disadvantage of the price is the asset price bubble – it may cause the price of housing to increase further generating more speculation. This may continue till prices are high, then the bubble will burst causing prices to fall – leading to losses for builders and homeowners. However, rents would fall as well, which is better for tenants.