What Causes House Prices to Rise and Fall?

I wrote a lengthy summary of the main factors that affect house prices here.

In the UK, the supply of housing is fairly inelastic; this means it is unresponsive to changing prices. The number of houses being built is relatively low, therefore, supply increases only slowly. This means that changes in demand for houses will be influential in determining house prices. A small rise in demand will cause a significant rise in price. But, also a small fall in demand will cause a significant fall in prices. (It is a myth that areas with shortage of supply cannot see falls in prices)

What Determines Demand for Housing?

Traditional factors.

1. Incomes. Economic growth and rising incomes means people can afford bigger mortgages so demand for housing rises.
2. Interest Rates.  Higher interest rates increase cost of mortgage repayments, reducing demand for buying.
3. Number of Households. Rising population leads to increased demand. Also, the number of households can increase faster than the population. For example, recent years have seen an increase in the % of single people households. Social factors such as rising divorce rates can influence demand for housing

Less Traditional Factors

1. Speculation. An increase in the number of buy to let investors mean that more homeowners are buying houses for the capital gains. Therefore in a property boom demand from speculators will rise. When prices start to fall, they will be keen to sell.  This makes the housing market more volatile and contributes to a boom and bust nature of the housing market.
2. Availability of Mortgages. If unconventional mortgage are freely available it enables people to take out bigger mortgages. This supports  a rise in the house price to income ratio. However, in a credit crunch there is a squeeze placed on mortgages leading to a sharp fall in the number of first time buyers who are able to get mortgage funding.

See: Why House prices are falling

• Main factors that affect house prices