Factors that Affect House Prices

Readers Question: I would like to know that what are the factors that effect the price of houses in UK and does government policies make any difference to it?

The most important factors for influencing house prices in the UK

Market sentiment. If people see house prices rising and they expect prices to continue rising, more people will buy a house. Also, when confidence in the market is high, lenders are more willing to lend mortgages with small deposits / large income multiples. At the moment(2009) confidence is very low, people see house prices falling so don’t want to buy and banks don’t want to lend mortgages without a big deposit.

Interest Rates. The cost of mortgage interest payments depends on the interest rate set by the Bank of England. If interest rates are increased, the cost of mortgage repayments rises; this discourages people from buying and it may force people to sell. In 1992 interest rates were over 12% and this caused a large fall in demand for housing and house prices fell. However, at the moment (2009) interest rates have been cut very low (1.5%) but demand is still falling. It is cheap to pay a mortgage, but, this is outweighed by the fact mortgage availability is low and confidence is low.

Economic Growth / Unemployment. Strong economic growth and falling unemployment increases disposable income meaning people can spend more on buying a house. It also increases confidence in buying a house. When the economy goes into recession (falling GDP and rising unemployment) many are put off buying a house so house prices are likely to fall.

Mortgage Availability. At the height of the housing boom 2003-2007, banks were liberal in giving mortgages. We saw self-certification mortgages, interest only, 100% mortgages, mortgages 5 times salary. This increased the number of people able to buy. After the credit crunch, the availability of mortgages fell sharply because banks didn’t / couldn’t lend any more. This caused a fall in demand and prices. This factor has shown to be very important.

Supply. A shortage of supply is liable to cause rising house prices, especially in the long term. Due to long term shortages of supply, some predict UK house prices will rise in the long term quite significantly. In the US, they currently have a surplus of housing supply so a rebound in the property market is unlikely. (long term factors affecting price)

Demographic Factors. A rising population will cause rising demand for housing in the long term. As well as population it is important to consider the number of households. e.g. an increase in the number of divorces and single people increases demand for housing more than rise in population

Speculation. When prices are rising, people may buy houses as an investment property. e.g. many foreigners bought houses in the boom years. There was also a rise in buy to let housing.

Ratio of House prices to income. In theory, house prices should reflect a ratio of house prices to income in the long term. However, in the short term house prices can often rise much faster than income because of the factors mentioned above.