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3) The results for the distance from the central town area are different from others because the main majority of the whole public wants to own a place right next to the town centre to minimise the distance that you have to walk.
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4) The type of house that the public is interested in is based on their personal liking and this is just to show how the public interests can vary. Houses in some areas still have such houses and the buyers usually redecorate or refurbish to restore its beauty
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5) Young house buyers are very distinctive because as you can see, not many live with their parents anymore, since they are working or in university or married. It seems that many live with a partner and with another friend of theirs. This shows that there are many couples who are looking for a place to stay are looking for an ideal place to live for them to be comfortable.
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6) The result of the value of income shows that it is clear that the average incomes of the UK is rising because more people seem to be willing and able to pay for the house on market (effective demand )
- 7) Another large portion of the surveyors chose certain areas because of job opportunities. This is a very attractive attribute, for which a person is able to get a job to have his/her own income and gives rise to the option of purchasing a house
- The type of house that the public is interested in is based on their personal liking and this is just to show how the public interests can vary. Houses in some areas still have such houses and the buyers usually redecorate or refurbish to restore its beauty.
- Many employees or students have to get to university of their workplace so they either live near their destination or they live near a source of transportation for easy access to their destination.
- The younger part of the public would like to be close to a source of entertainment (London has many sources of entertainment so many students want to live there).
All of these charts have been authentically recorded and it has given many aspects from how the people choose their housing. From the results, the majority of the vote for specific choices will be what raises prices in housing because there is more demand for that aspect of the area. The seller will view it as an opportunity to increase his prices, making a profit from the attraction.
ANALYSIS of factors that affect house prices
Housing Supply and demand
This diagram illustrates the equilibrium market price (EMP) (P1). House prices are primarily formed by the amount of demand or supply is present in the economy. If there is an extension in supply, prices rise because there is excess demand (Q2-Q3), meaning that the supply of housing is limited .Therefore the houses will experience a contraction in demand, meaning that the seller is able to raise the price as there will always be demand for it. On the other hand, a contraction in supply; extension in demand, the seller most probably will sell the property at a lower price that was published as the demand is too low, with excess supply of houses (Q2-Q3).
This shift in demand can be caused by many factors, which evidently drives prices up for housing. The demand curve is elastic because there are many substitutes that people could easily turn to if the prices are too high. Therefore if there is a change in price, the demand for housing would change quite substantially.
Also, other factors can produce the curve “demand 1”:
- Rise in price expectations which attract people to invest in housing, raising demand.
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Rise in real incomes, in which more disposable income is produced for purchasing a property and a house is a normal good so demand should increase as incomes rise.
- A fall in mortgage/interest rates raises demand.
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Demographic factor – the more populated the country is; the more housing is demanded to use as a home/shelter.
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A rise in the cost of substitutes (rented housing) forces people to consider the fact that buying a house is the cheaper alternative.
These factors will drive prices upwards. However if the opposite occurs (e.g. a FALL in real incomes) the demand curve will shift to the left or “demand 2”, driving prices downwards.
The supply curve is relatively inelastic because there are limited amounts of land and time periods between an alteration in price and an increase in the supply of new properties becoming available (building of new homes), or other homeowners deciding to put their properties to sell on the market.
Over the short term, supply is inelastic from the limited availability of land and other factors but over time, the curve gradually turns elastic. This is because:
- New homes that are built only have a lead time of a few weeks/months.
- Some buyers even buy off-plan, where the property is purchased even before the house is constructed.
- Some residential construction companies invest in this industry, exploiting the economies of scale, thus boosting housing supply to the market.
As supply becomes elastic, a sudden change in supply of housing, prices could rise or fall dramatically.
Some factors are associated with “Supply and Demand” can be split into groups of SUPPLY-side factors, affecting the supply of housing and DEMAND-side factors, associated with the demand for housing:
Supply-side factors
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Price and availability of land – There are restrictions on the supply of building land as the more urbanized areas such as London become extremely expensive due to the shortage of land. Places such as Brown field sites (glossary) are becoming scarce and the Green field sites are more expensive because the land is limited. The Green Belt is another area in which no-one is allowed to build on, resulting in an upward pressure on the price of housing in the UK because the aggregate supply is at a low level.
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Construction – When building a house, there are many things that add to the overall price. Labour comes in the form of wages and as more people are employed, the cost of the house rises. Raw material costs and the tax that is levied indirectly on them transfers to the house price. The cost of the land that is being built on is worth a certain amount; therefore all these raise the prices of houses indirectly.
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Occupants – With more couples divorcing, it is more likely that they will own houses/flats themselves. Elderly people also live by themselves or with a partner but with the UK’s average lifespan increases, there will be an increasing number of elderly people occupying a house on their own. This will mean that more properties will be only utilized by one person which severely shortens the supply of housing thus driving prices upwards.
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Time – The time for a transaction takes time to complete forms and purchase the house. The planning permission to build on land and the construction of the property takes an especially long in terms that the amount of houses that can be built cannot keep up with the growing demand for housing in the market.
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Area quality – a shortage of good quality properties in many areas could force up market values.
The supply of housing can affect the price of housing greatly as shown in the diagram. The availability and amount of land to build on is significant because areas such as central London have scarce land but huge demand for the housing that is on sale, sending the prices soaring rocket high. This would produce Supply 1, when price rise due to low supply of land. However if demand for housing falls, over time when new houses are built, not enough demand is present for it to sell successfully (at a profit) and so the price will be forced down, shifting the curve to the right (Supply 2) for a given level of market demand.
Demand-side factors
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Availability and Number of close substitutes - Consumers do not need to be forced to purchase a property. Therefore, alternatives are always considered whether or not they should purchase a house. Substitutes such as mobile homes, caravans, and buy-to-let properties for tenants. Rented properties can cause demand to fall for housing because in the short run, renting out accommodation is a much cheaper alternative and it will be the most used substitute compared to houses. If demand decreases, house prices will eventually decrease as well.
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Consumer Confidence - Confidence is vital in the housing sector. If expectations for the future performance of the economy deteriorate and have financial problems, they will be tempted to not buy a house at all; therefore demand and prices will fall for houses. Equally when the economy is enjoying sustained growth and rising prosperity, improved confidence raises the number of homebuyers. This would aid the seller as there will be a short supply of housing.
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Income/ (elasticity of demand) - People with an income realize that a house is the biggest asset that they will purchase. As average living standards rise, the total demand for housing spreads, as does the demand for more expensive properties as people look to move "up market", with a larger income to rely on. With an increased income, more people are likely to afford a house with more disposable income and with the ability to purchase larger houses by borrowing more money from the bank as they will be willing to lend that person large amounts of money. Income elasticity of demand refers to how a change in income can affect the quantity demanded for housing:
Percentage change in quantity demanded
Percentage change in income
Income affects housing because it is a normal good and so as income rises, the quantity demanded for housing will increase, adding value to the price of the house.
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Interest/Mortgage rates - The interest rates determine the amount of money that needs to be spent, controlling inflation. If these rates rise, then more firms will increase their prices to cover their costs of production (e.g.: labour). More people will have less disposable income to spend on even the minor things such as clothing let alone buying a house. Mortgage rates rise and create negative equity and repossession of people’s belongings. Demand will fall for housing and prices will follow suit. On the other hand if interest rates lower, from the diagram, the mortgage rate lowers and the base rate lowers. Buyers will seize the opportunity because they will pay less interest to the lenders when they borrow large amounts of money and less of the disposable income is used to pay off the debt.
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Expectations of future price movements - With housing booms such as this (an annual rise of 22.7%-23.2% in price of housing in 2002), it is not surprising that many people would believe that the prices will continue to rise. This speculative demand can lead to increased demand for housing because many will own two properties, with one on rent to a tenant as extra income. This is very important as many people invest a large amount of money in housing to gain profit.
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Employment - Financing a house purchase involves making a long-term commitment through a mortgage lender; changes in unemployment levels exert a significant impact on housing demand. For example in areas when unemployment remains persistently above the national average, average incomes are likely to be lower and confidence among buyers will be negatively affected, and so prices for housing will fall. Although people obtain jobs in London, when they live in Newcastle, they will be geographically immobile because they cannot move to such an expensive area, especially when their house is worth far less, lowering the demand for housing, and putting downward pressure on price.
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Inflation – This is caused by the ever pushing rise in demand for housing by demand-pull inflation. The excessive demand for housing will evidently put an upward pressure on prices:
This diagram shows the demand-pull inflation concept of how, as supply is low, the prices for housing will continually rise, pushing up inflation.
However, house price inflation will add household wealth to the owner because the prices are rising. More people will borrow money as you pay less from what you borrow originally (reduced purchasing power of money).
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Government taxes/policies - Government policies affect the housing sector in a myriad of different ways ranging from benefits for council taxpayers on low incomes to the payment of stamp duty on the most expensive properties. The government can also sets a maximum limit on the price of houses which will allow more poor people to purchase housing, increasing demand for housing but small supply because many tenants will not want to rent out rooms at such a low price.
Two main concepts of elasticity is price elasticity of demand and supply. These measure the responsiveness of a change in quantity demanded/supplied relative to a change in price. To work out their elasticity you use two formulas:
Percentage change in quantity demanded or supplied
Percentage change in price
The elasticity of demand is major role in house pricing because an elastic curve would mean that a slight change in price could boost demand greatly or severely reduce it.
It is similar with the price elasticity of supply, although supply relates to the amount of housing, where an elastic supply curve means that when prices alter, the amount of housing that will be supplied (constructed) would be considerably more or less.
From this sector, there are other minor factors that affect the price of houses:
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Semi-detached and Detached properties - The Nationwide study found that if a semi-detached property was sold, and a detached property the same size, with all the same features, in the same area was bought, it could cost 14% more.
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The number of bedrooms - A rise in the number of bedrooms can add to the market value of a property - but the valued added is limited by the total floor space available. Extensions to property (i.e. from loft conversions or other extensions) have a greater impact on the market value than creating more bedrooms from the same floor space
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Home Improvements – New extended conservatories or garages can raise the price of a house by 6%.
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New and second hand homes – People will tend to contribute more money towards a new house than a second hand. This is likely to reflect that new properties have builder's warranties, and will tend to incorporate the most modern building technology.
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Geographical location – A house built on a high hill, without a risk of flooding will be more sought after, increasing demand, and inevitably, price. A property will cost less due to the risk of natural disasters (e.g.: flooding).
These two similar flats/apartments have only one distinct difference, their price. This primarily links to the factor of “Location” because one of the flats is situated in London, where land is scarce but very popular because of all the attractions that the capital has to offer (entertainment/tourist attractions/main government buildings). On the other hand, a flat in Surrey is much less desired than the London apartment because it is not a well-known area.
These two graphs show the two different areas and how they are very different because the London area is more expensive than the Sutton area. This is all connected with location as the land in London is far more attractive than a strip of land in Sutton.
Articles
Conclusion/Evaluation
This project has explored many areas in terms of the way house prices are determined economically and how they are affected by other factors. It seems that the housing market is “booming”, with interest rates as low as it was 38 years ago (4%) as well as mortgage rates. From the diagrams on the articles page, you can see that the prices of houses have risen dramatically.
However it seems, in the future house prices may still be going strong but the. The fear is that of negative equity occurring, forcing the occupants of the house to pay back the debts or face repossession of the property by the bank. It is caused by the freakish rise in house prices that effectively boost up inflation, thus raising interest rates to control this inflation via tight monetary policy. Once inflation occurs, we will see a general rise in prices of all goods/services. Taxes such as income tax and VAT (value added tax) will be pushed up by the government’s strict fiscal policy
What is hopeful is that this inflation does not rise too much and deflate, lowering the price level of the economy.
There are numerous factors that affect house prices. However some are much more effective than others. One of the major factors that have played an exceptional part in the creation of house prices is SUPPLY AND DEMAND. This is because this principle is the heart of how all prices are determined and houses are no exception.
ELASTICITY determines the changes in demand and supply, thus altering the price of housing either upwards or downwards according to the value of the property.
INTEREST/MORTGAGE rates are particularly effective when low because many people will borrow from banks to purchase a property.
AVAILABILITY/NUMBER of CLOSE SUBTITUTES -
Glossary
“Real” price – The cost of something after it has been taxed (e.g.: post inflation).
Effective Demand – When the buyer is willing and able to pay.
Aggregate Demand/Supply - Total demand for a good or service.
Derived Demand – Demand arisen from the demand for another good/service
Equilibrium Market Price – The price which is determined by the forces of supply and demand.
Excess demand/supply – When there is too much supply/demand of goods/services.
Inelastic supply/demand – Not very responsive relative to a change in price.
Elastic supply/demand – Very responsive relative to a change in price.
Brown field sites – Area of land which have been built on before.
Green field sites – Area of land which has not been built on before.
Green Belt - An area of land untouchable for any urban construction to be present by the government law.
Deflation – decrease in the general price level of the economy.
Speculative demand – demand whish is predicted and determined by expectations of shifts in price.
Normal good – a good that increases in demand when income rises.
Demographics – the study of population growth within a country.
Repossession – when one’s possessions are taken by lenders(banks usually) to repay debts.
Bibliography
Economics – Alain Anderton
