Why Have House Prices Increased Faster than Inflation?

Halifax have announced figures to show that in December house prices rose by 1.3%, cancelling out the previous month’s fall. This shows that the doom and gloom surrounding the UK Housing Market may be slightly exaggerated. However, some people question how reliable the data is. For example, other statistics such as mortgage approvals show definite signs of weakening.

Annual House Price inflation 2007

Despite the rebound in December, the Halifax figures show a fall in house price inflation to 5.6%. This means that the average house price increased by £11,759 in 2007, to just below £200,000. - £197,031

This is one of the slowest rates of house price inflation for several years; it is below the long term house price inflation average of 8%. In the past decade house price inflation has been even more extreme. - In the past 10 years alone, house prices have increased by 187%

Why do House Price so Frequently Rise faster than Inflation?

1. Housing is seen as a luxury good. People have been willing to devote a bigger % of their income to mortgage repayments. The desirability of owning a house in the UK is deep seated, people have been willing to make financial sacrificies to get on the property ladder
2. Demand Increasing Faster than Supply. The market trends of the past decade are largely driven by shortage of supply and rising demand. This is partly due to an increase in the number of households.
3. Easier Availability of Finance. Banks have increased the flexibility of mortgages enabling people to borrow bigger % of income. If the credit crunch does seriously impact on the mortgage market, this factor could be reversed in the short term.
4. Lower Real Interest Rates. In the past decade average interest rates have been much lower. In this post, the interest rate cycle, you can see how high interest rates were in the 1970s and 1980s