What Factors effect House Prices?

House prices in the UK are probably one of the most popular topics of conversation. Partly this is due to the the fact house prices have nearly trebled since the mid 1990s. This has left a situation where homeowners have seen tremendous gains in wealth; Whereas those struggling to get on the property ladder have been left with a seemingly impossible task.

These are the key factors that determine house price. In particular, it explains why house prices are so expensive in the UK

Supply and Demand.

This is the basic determination of house prices. If demand increases faster than supply house prices go up. In the UK, the number of new houses being built is very low compared to the increase in demand. This is the fundamental reason for rising house prices. For house prices to fall, the demand would need to fall significantly.

Of course there are many factors that determine demand for houses.

Interest rates.

The bank of England set the base rate for the whole economy. If interest rates rise, mortgage lenders will increase the cost of variable mortgage payments. Therefore, with higher interest rates it is less attractive to buy a house and be lumbered with high mortgage interest payments.

• If people have a fixed rate mortgage interest rates, will have less effect. However, at the end of their fixed period they will have to remortgage to a deal reflecting new interest rates.
• Interest rates are a very important factor in the UK because many people have a variable mortgage. Mortgage payments are also a significant % of income. A small change in interest rates has a big impact on cost of mortgages.
• Interest rates sometimes have a delayed effect. E.g. interest rate increases last year have more of an effect now.

Demographics

Increasing levels of net migration are increasing demand for houses. In particular immigration from Eastern Europe, such as Poland and Romania are boosting the UK population. Therefore, causing rise in demand.

Another factor increasing the number of households is demographic changes such as number of people living alone. E.g. rising divorce rates have increased the number of single people living alone.

Expectations.

There is an element of speculative buying in the housing Market. This is particularly the case in the buy to let market. If people expect falling house prices in 2008, it may encourage people to sell and cash in their capital gains. If we are not careful, falling prices can create a multiplier effect where others are encouraged to also sell. Of course, most people buy a house to live in, not as an investment. But, falling prices will encourage some potential homeowners to rent rather than buy.

Economic Growth

Economic growth and rising wages will definitely enable people to be able to afford to buy a house. However, in the past few decades the ratio of house prices to incomes has increased, showing that other factors are at work as well.

Mortgage Industry

The state of the mortgage industry is important. For example, the willingness of banks to lend mortgages is significant. The global credit crunch has reduced the willingness of banks to lend mortgages, especially in the sub prime market. Therefore, because it is more difficult and costly to get a mortgage demand will fall.

Location

The location causes significant variations in UK house prices by geographical region. Even within different suburbs of London, house prices can vary tremendously.

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