Decreasing unemployment levels would be another factor which contributes to an increased demand for houses, as there would be more people with a job and financial income, therefore an increasing number of people would be able to afford mortgages and cost covering would be easier. An example of this would be a couple looking to get on the property ladder, where costs such as interest rates could put them off and therefore demand for houses may go down with just one person’s income. However this problem could be overcome if the partner was also employed, making it easier to afford the mortgage with two incomes and thus demand for houses would increase as there would be more people that could afford it.
One final major factor would be an increase in the price of rental accommodation, a substitute to buying a house. If the prices of renting a house/flat increases then people may think that they may as well just spend a bit more extra and just buy their own home, instead of living in an expensive rented one. This would lead to an increased demand for houses and flats as more people will be better off just buying a property of their own.
Other minor factors would include demographical reasons such as an increased number of single people wanting homes and an increase in population. These could be due to factors such as longer life expectancy rates, therefore more single old people, an increased rate of divorce and fewer marriages.
Supply refers to the total amount of a good or service available for purchase. Supply of housing can be said to be fixed in the short term, as it takes time to build new houses. Therefore it can be said that demand factors affect the housing market more than supply factors in the short term. However if the supply of housing doesn’t affect the price, then an increase in demand will lead to a big increase in price.
In the long term there are many factors which affect supply of houses. These include costs for making new houses, availability of planning permission and opportunity cost for builders. If the costs for making houses increases then there will be a decrease in the supply of houses, as it will be expensive to make mass number of houses e.g. estates. Also it is quite hard to obtain planning permission in places such as rural areas and therefore this will also decrease supply of houses. Opportunity costs for builders will have an affect on supply in the housing market, as a decision will need to be made to see if the builders can be used in a more profitable way for the money, therefore this can contribute to a lack of houses being supplied as there are more important jobs to be done, e.g. better investments, and making better use of the land.
The most important factor in the UK housing market could be said to be the ability to be able to buy a house. This can be reflected in a person’s mortgage. A mortgage is a “loan to finance the purchase of real estate, usually with specified payment periods and interest rates.” It is quite rare to see people buy houses fully from their initial savings. In this case a loan needs to be taken out from a bank or building society. Before the 1980’s these were only available in building societies however you can now take mortgages from your bank. Below is a chart showing the amount of loans taken out for house purchases. It shows a general increase in the amount of loans taken out to secure a house, however there is a drop in 1992 where it seems to reach it trough. This could be due to high interest rates which would have put people off from buying a house, or due to the removal of a policy called MIRAS which I will discuss later.
Data source: Council of Mortgage Lenders
Equity is the difference between the mortgage taken out and the value of the house you are buying. The difference could be borrowed using the property as a security for the loan. Negative equity is when the price of your home is valued at less than the price of your mortgage. Many suffered from this in the late 1980’s when interest rates went up to roughly 16%. If a person’s mortgage is hard to pay back, they could potentially loose their home. Therefore mortgage is a very important factor which influences the housing market as it can be the difference between having a successful running house and leaving a family homeless.
Another important factor which influences the housing market is Stamp Duty. In the late 1990’s Gordon Brown removed the Mortgage Interest Relief at Source benefit. This basically reduced the house owner’s liability to income tax and made borrowing of money cheaper and contributed to the increase in demand for housing in the eighties and nineties. The stamp duty land tax is basically a percentage of the value of a house you wish to buy which you pay to the government. The price of the house determines how much you pay on Stamp Duty Land Tax. Below is a table showing the amounts paid according to house price.
Information source: http://www.direct.gov.uk/en/MoneyTaxAndBenefits/Taxes/BeginnersGuideToTax/DG_10010529
This may not seem like much to pay, however it is argued that the Stamp Duty levels are causing many problems for first time buyers.
The trends in the past five years or so in house prices seem to be increasing. According to Halifax “UK house prices have risen uninterrupted every year since 1996 to 2006”. In 2006 it was reported that “the average house price was rising by almost 14% a year compounded”, which is also a figure from Halifax the Britain’s leading Mortgage lender. This is due to many factors such as reasons for such high demand, which include the ageing population, the increase in single families, divorce rates and also the increase in younger people wanting to buy houses. In terms of prices of houses in the near future, I think house prices will still rise steadily however interest rates will slowly decrease and therefore this will not have as much affect on mortgages as it did in the past when interest rates were as high as 15%.
The graph above shows the average house price in the U.K from 1975-2005. Although this data is not necessarily up to date, by looking at this graph it can be predicted that house prices will rise in the next couple of years. However there are many arguments for and against this view. Main arguments against the house prices rising are:
The ratio of house prices to incomes has risen to an all time high-
In the UK the ratio of house prices to incomes is 50% higher than the long term average (1975-2005).
House prices unaffordable for first time buyers- it is becoming increasingly difficult for first time buyers to get on the property ladder. This is mainly due to the rise in house price to earnings ratio. However to some extent this problem has been got around by banks being willing to offer bigger mortgages compared to salaries. The Abbey National recently said it would lend 5 times a borrowers salary. Banks are also considering mortgages over a longer period. This increased generosity in lending has helped to keep the market buoyant without addressing the underlying problem of overvalued house prices.
And the arguments for the rise in house prices are:
Rising Price of Renting. With the price of renting rising as well, it still makes sense for people to borrow as much as they can to get on the housing market.
More Flexible Mortgage Lending New longer more flexible mortgages means people can still afford the mortgage interest payment.
In conclusion it can be said that many factors cause a increase in demand in the Housing Market in the UK, however there is just simply not enough supply for this demand to be met due to such a high increase in each of the above factors stated, e.g. divorce rates. I do not think that equilibrium will be reached with demand and supply of housing in the UK, and therefore the prices of houses will alter and overall, increase in the short- term e.g. next five years, however beyond then, it will take a steep fall as there may be more alternatives or even cheaper alternatives to buying, and also more opportunities may come up, e.g. universities accepting students for more than one year at campus. This change will be similar to the incident in Japan in 1991 where house prices were very high and since have been falling consistently.
Reference to further sites
∙ http://www.lendingpartners.com
∙ http://economics.about.com
∙ http://www.uk-houseprices.co.uk
∙ http://www.mortgageguideuk.co.uk/housing/house-price-fall.html