The Age also has a major difference on the value as well. Houses can be split into three different categories, these being Old, New and Modern. Old houses have period styling and therefore have certain features which some people like, such as fireplaces, high ceilings, big windows and rooms and Grand styling such as Victorian and Edwardian middle and upper class houses. This creates desirability for such properties, as they are limited in number depending on age. E.g. there are more Victorian than Edwardian houses as the Victorian period was longer than the Victorian one, but there are less Tudor houses due to the fact that they are much older and therefore have been mostly destroyed over the ages. However different periods are more desireable than others, for example Georgian houses from the 18th century are generally worth more than houses from the Victorian period due to styling, whereas both are more desirable to live in than Tudor houses which have uneven floors and poor construction.
New Houses are also desirable as they are new, and so carry the kudos of being new and not previous lived in before and so carry a premium. They also mostly incorporate the latest building techniques and are generally more efficient places to live in. The new housing market is relatively inelastic as houses take time to build as planning regulations, land availability in the desired area can be a problem. This means that if there is a sudden surge in demand for new houses the construction industry cannot respond very quickly to soak up the demand and it is therefore relatively inelastic
Modern Houses are unfortunately neither new nor fashionably old. This means that they do not command the highest price. People generally either want an old style house with its charms and size, or want the efficiencies and kudos of living in a new house. These houses are generally from the 60’s. 70’s and 80’s and so are not of the latest ‘retro’ fashion, and are generally not too efficient either. Their price reflects this in the table below. Market trend is not for this style of house therefore the desirability is reduced and the price is lower.
Here we can see in my example market of London where the price of property changes depending on how old the house is. This table shows how desirability of a house and price is an elastic demand situation.
Home Improvements can also have a huge effect on the value of a property in certain areas, for example in London where land is at a premium and planning regulations are strict. If a property has a double garage or an extension it can add tens of thousands of pounds extra to the average value for that street, however in the provinces where land is not at such a premium a double garage is not worth as much maybe between 3-5% etc. This is because modern families like the convience of being able to store etc freezer units and unwanted stuff in garages. This is to say that certain features in certain areas will make the value of the property increase.
This is also true of extra bedrooms, loft conversions to make extra rooms add to the value of the house, however dividing rooms up which creates more rooms in the same floor space however does not add to the value of the house.
Land availability is also a crucial point in deciding the value of a house. In Greater London there is no more land available to build on, and many preservation orders on existing buildings, this means that very few modern buildings can be build, and only when an existing building is demolished. This leads to artificially high prices in London due to the lack of land, whereas a new house in an housing estate built in a Greenfield area such as Ingelby Barwick near Stockton houses are much cheaper as there is a lot of available land to build on.
In the above paragraphs I have outlined the theories behind why location of a house effects the value, and how the type of house in the same area effects the value of a house. However there is a second reason why house prices differ regionally and that is economic growth.
Economic prosperity is not spread equally through out the country, and therefore certain areas have less employment and so less economic growth. Areas such as Cambridge have a high growing science and research industry that attracts well paid professionals. As companies compete for key staff they pay greater wages, which leads to private sector professionals earning huge amounts of money, more than what they could expect to earn else where. This leads to people been able to borrow more money and spend more money, so houses in Cambridge for example are desirable, and because the local population is generally very wealthy they are willing to pay more money, and so house prices rise toabove the national average.
However the same is not true for areas such as the North East. The North East has been dogged by unemployement since the demise of the coal and ship building industries, this has led to population drift where people are moving out of the area, as opposed to moving to the area like with Cambridge. As people are moving out there is a lower demand for the houses and so the command a smaller price.
Here we can see that as the Quantity demand increases the price of the good also increases, but because this is such an elastic area of the market, relying on economic growth and public perceptions extra demand commands a much higher price. People are willing to pay as much as they can afford to live where they want to live.
Also because the North East suffers high unemployment then there is less money spread about the people, this results in people not being able to afford houses. So the supply is higher than the demand and so properties are reduced in value to a level where local people can afford them.
House Prices over Time
The second part of my essay concerns itself with how prices differ over time, and what effects this.
House prices have significantly increased over the past 30 years due to inflation, this is to say that the value of money has dropped and so you need more to buy a certain good, like a house. Inflation is caused by varying factors which I will outline in the following paragraphs.
This graph shows how inflation is still steadily increasing year upon year, showing the continuing growth and prosperity Britain is enjoy as we all pay our selves more money.
Government Policy can directly have an impact on the housing markets prices as they may decided to cut interest rates, which increases inflation. However if a Government lets the country go into recession we can see interest rates go through the roof, and inflation become negative as how prices drop, as seen in the early 90’s in Britain.
Other Government Polices can be good for this market, for example Margaret Thatcher’s Government introduced the ‘Right to Buy’ policy which resulted in over one million people buying there council homes. This inspired the consumer, consumer confidence rose which saw the housing boom of the 1980’s that crash landed under John Major.
Recession is something hits the housing market harder than most other industries, as most people have mortgages on their homes, (the most expensive object they will own) recession causes house prices to crash, but the mortgages do not shrink resulting in negative equity. This is where people owe more on their house than it is actually worth. Recession is usually caused by over confidence in the housing market, during the early 90’s recession it was widely thought to be caused by the huge consumer confidence during the 80’s.
Most of the inflation comes from economic growth, during times of economic boom the workforce gets paid more, the service industries gain more custom, people become better off. When people have more money they are willing to spend more of it, so demand on products increases and so price goes up, house prices go up also with this trend. This explains why Britain’s houses are costing more than ever as inflation increases.
However during periods of economic unrest like seen in the 1970’s (1.5 million workers went on strike against the Work Relations Bill) Britain’s economy practically came to a standstill. While the power cuts and three-day working weeks were on house inflation went through the roof, at 40% the biggest increase in one year, and the biggest increase seen since.
Interest rates also affect house prices, as with lower interest rates mortgages are more affordable, when they more affordable more people are willing to enter the housing market, prices increase as demand goes up. This has happened recently, as interest rates have hit an all time low under the guidance of the Bank of England thus meaning mortgages have become more affordable and so more people have been buying houses and so the value of houses have increased.
‘Unemployment levels’ is the final factor in explaining why house prices fluctuate once adjusted for inflation. During times of high unemployment people have less money in general and so less people can afford to buy houses, therefore the demand is lower and the value of houses drops below the rate of inflation.
The above factors: Unemployment, Interest Rates, Government Policy and Economic Growth all effect the housing market and cause house prices to fall or exceed the rate of inflation. Government Policies can cause a lack of consumer confidence, leading to a downturn industry leading to job losses and market values of houses falling below inflation. The opposite can also happen and boom can happen with house costs rising above the rate of inflation. The market follows a cyclical pattern, with times boom causing houses to rise above the rate of inflation before a period of recession the stabilisation before the whole process repeats itself.
