The Different Determinants Of House Prices Economics Essay

House prices are determined by demand and supply. If demand increases (change to the right) or if supply falls (shifts left), the equilibrium price of homes will rise. In the same way, if demand falls or resource rises, the equilibrium price will show up.

So, the home prices rise so quickly in the 2000s, but show up in the 2008. The reasons lies mainly in change in the demand for housing. There are various factors that damaged the demand for property are express in the below;

Incomes (real and predicted):- Within the begging of the 2007 was time for swiftly rising earnings. The overall economy was experiencing an economics "boom". Many people wanted to spend their extra earnings on real estate; either buying a residence for the very first time, or moving to an improved one. Many people thought that their incomes would continue to develop and were thus ready to stretch themselves financially for a while by buying an expensive house, self-assured that their mortgage repayments would become more and less expensive as time passes. In 2008/09 by contrast, were periods of recession, with rising unemployment and either is dropping or a lot more slowly growing incomes. People had significantly less assurance about their capability to cover large mortgage loans.

The cost of mortgages:- in early 1990s the mortgage loans rates was significantly less than now. That recommended people could manage larger mortgages and thus manage to buy more expensive houses. But home loans rates of interest were now increasing. Many people found it difficult to keep up existing repayments, let along to take on a larger home loan. In 2003 home loans rates were generally reduced again, once again fuelling the demand for homes. Even when the interest rates rose little by little over the time from 2004 to 2007 they didn't come near to the rates come to like before. By 2008/09, however, higher mortgage rates of interest were becoming increasingly unaffordable for many people which was one factor contributing to the original downturn in enclosure prices.

The availability of mortgages:- in the cover increase in 2003 to 2007, home loans were easily available. With house prices increasing, finance institutions and building societies were ready to accept smaller debris on houses and lend a larger multiple of people's income. After all, if borrowers were to default, lenders would still have a very good potential for getting all their money back. In the begging of the 2008 banking institutions and building societies were more wary of granting mortgages. They were aware that, with dropping house prices, increasing unemployment and the growing issue of negative equity, there is an increased danger that borrowers would default on payments. In 2008/09 the problem was compounded by market meltdown, meaning that finance institutions had less overall to lend.

Speculation:- in the casing growth, people generally presumed that house prices would continue rising. This encourages visitors to buy immediately and take out the biggest mortgage loan possible, before prices proceeded to go up any further. There was also an effect on supply. People that have houses to market held back before last possible second in the wish of getting a higher price. The net effect was rightward move in the demand curve for residences and leftward transfer in the supply curve. The result of this speculation, therefore, was to help create the very impact that people were predicting. In 2008, the contrary occurred. People thinking about buying houses organised back, wishing to buy at less price. People with houses to market tried to sell as fast as possible before prices fell any future. Again the effect of this speculation was to aggravate the changes in prices- this time a fall in prices.

Speculation in recent years has been compounded by the progress in the "buy to let" industry, with mortgage lenders entering this market in large numbers and plenty of media attention centered on the possibilities for folks to make very high returns.

The romantic relationship between demand and price:-

When the price tag on a good increases, the quantity demanded will fall. This relationship is known as regulations of demand. You will discover two known reasons for this laws

People will feel poorer. They will not be able to afford to buy so much of the good with the money. The purchasing power of their income has dropped. That is called the income effect of a price rise.

The good will now cost more than substitute or substitute goods and people will change to these. This is called the substitution effect of a price surge.

Similarly, when the price of a good falls, the quantity demanded will grow. People can afford to buy more and they will switch away from consuming choice goods.

The demand curve:- ( show the demand curve for the cover price in uk)

Other determinants of demand:-



Distribution of income:-

Movement along and shifts in demand curve:- it is assumed that nothing of the determinants of demand other than price changes. The result of a change in cost is then simply illustrated by the movement along the demand curve. However when the determinants change then new demand curve needs to be creates. When a change in another of the other determinants cause demand to rise like price boosts then the complete curve will change to the right. This shows that at each price more will be demanded than before.

As UK enclosure price surge than the demand curve in the right transfer in the last few years however when the casing price fall down then the demand for the house will be the kept curve.

Give the diagram pp35

Supply and price:-

When the price tag on house rises the quantity supplied will also rise. A couple of three known reasons for this

As firm source more, they are likely to realize that beyond a certain level of output, costs rise more and more rapidly. In that case real estate agent want to generate increasingly more house.

The higher the price tag on the housing marketplace, the more profitable to do real estate business. So, enclosure agent will thus be encouraged to sale more house by moving over from the less profitable real estate business.

Given time, if the price of the house remain high new people will be encourage to create business but the people will not to in a position to buy house if the income is not increase.

Other determinants of supply:-

Like demand, resource is not simply dependant on price. Other determinants of source are as follows;

The Costs of production:- the bigger the costs of creation, the less profit will be produced at any price. As costs surge, cover agent will scale back to the sales house. The main reasons for change in costs are as follows

Change in type prices: cost of development will go up if salary, raw materials prices, rent, rates of interest or any other insight prices rise.

Change in technology: technology developments can fundamentally change the costs of development.

Organisational change: various kind of cost saving insurance plan by the organisation demand could be changes. Like plenty of organisation having downsizing the staffs because of this having unemployment and people have burning off job. Because of this, income going down and demand for the house decreasing.

Government insurance policy: cost will be lower by administration subsidies and raised by various fees. Same as cover price in the UK effected by government policy which will be the favour of the folks or not, if the plan from the government is wonderful for individuals than people will buy house often not.

A change in demand:- if one of the determinants of demand changes other than prices, the whole demand curve will move. This business lead to a movement along the supply curve to the new intersection point. When the rise of the house buyer's income rise than demand of the home increase. Also, if the income not change the demand will stay remain.

A change in supply:- if one of the factor of supply changes other than price the whole resource curve will switch. This will lead to movements along the demand curve to the new intersection point. When the housing price climb because of the less source and high home loan rate than automatically the source for the house decrease.

Diagrame pp-45.

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YES House Prices may Fall

The ration of house prices to Earnings has increased to an all time high. This means that the average worker is unable to afford a residence in many areas, this will lead to a fall season in prices

Demographic factors suggest the populace will probably show up soon. Therefore there will be less people happy to buy properties.

Low Interest rates have helped keep carefully the housing market strong nonetheless they may rise in the foreseeable future as the economy accumulates and inflation goes up above its inflation goal.

Rising house prices have encouraged speculation. This implies people buy houses in an effort to make capital increases. However as prices start to fall these folks will commence to sell causing a bandwagon effect of an ever increasing rate of dropping house prices.

Some areas of the country are more susceptible to falling prices these are the areas which found the biggest raises in the 90s

With changing interpersonal attitudes. Couples may be more likely to live their parents for longer

NO- House Prices are Unlikely to Fall

The proportion of house prices to earnings has increased but this is sustainable because inherited prosperity is increasingly getting used to buy houses.

Housing has a higher income Elasticity of Demand (YED), therefore people are willing to spend an increased % with their income on housing

Despite a stagnant human population there can be an increasing trend for smaller households e. g. solitary parents solo old people and children giving home previously.

Supply of cover is not increasing. The amount of new house built was the lowest since the war, also many council residences built in the 1960s are being knocked down, because these were associated with various communal problems

Many residences in London have been bought by foreigners

In depth EXPLANATIONS WHY House Prices are Falling

1. Lack of Mortgage loan Finance

At as soon as, the lack of mortgage funding is one of many factor in falling demand for casing. The Council of MORTGAGE BROKERS suggest that home loan approvals have fallen to the lowest levels since 1991. Upto July 2007, mortgage brokers were very competitive and wanting to draw in customers with home loan products such as 100% mortgages and high income multiple mortgages. However, the credit crisis has led to banks struggling to improve fund, therefore they experienced to reduce their mortgage loaning. To ration mortgage loans, they may have removed many home loan products, especially 'subprime' products. They have also increased the cost of many other home loans. (see: credit problems explained) In particular, mortgage lenders are necessitating large debris. This helps it be difficult for first time buyers to obtain a mortgage.

2. The percentage of house prices to earnings has increased to an all time high.

In the united kingdom the proportion of house prices to incomes is 50% greater than the permanent average (1975-2005) Source : Economist (1) Which means that many potential buyers are attempting to be able to get a mortgage. This problem has been exacerbated by the credit crisis(see also: percentage of house prices to income UK)

3. House Prices Unaffodable for FIRST-TIME Buyers.

In particular, it is becoming increasingly problematic for first time customers to get on the property ladder. That is mainly due to the rise internal price to cash flow ratio. In the past this problem was acquired around by banking companies being willing to provide 'ample' home loans (e. g. interest only, self recognition, 100% mortgages). For instance, before, the Abbey National lent 5 times a borrowers salary. This increased generosity in financing helped to keep carefully the market buoyant without handling the underlying problem of overvalued house prices. The Credit crunch has now made this difficult. (see also: percentage of house prices to income for first-time buyers)

4. House Prices can Show up - despite having limited Source.

For those who believe house prices can never fall, it is worth remembering the case study of Japan. Within the 1980s there is a similar boom internal prices in Japan. But since the peak of 1991 house prices in Japan have fallen for 14 consecutive years, resulting in considerable financial problems such as lower consumer spending. House Prices have also started to show up in the U. S. A. US prices have finally fallen significantly since their top in 2007.

5. Speculation in UK Housing Market.

Traditionally, the view of the housing market is that it's not just a secured asset, but a place to live. Therefore, unlike the currency markets, house prices won't surge and fall due to speculation. However a lot of demand for UK property is coming from buy to let traders. Many buy to let traders are in the market for the future; however, given that prices are slipping, a few of these speculators are likely to leave the market causing a significant drop popular.

6. Herding Aftereffect of UK Housing Market.

In a research newspaper Alex Hamilton argues that a lot of the housing marketplace is dominated by herding behavior. (Source 2) Which means that a lot of the rise in demand is induced by market sentiment somewhat than economic basic principles. Now the market sentiment has transformed people are less assured about buying. In a recent paper, the OECD stated that 15% of UK house prices were not reflected in economical fundamentals but 'froth' and 'speculation'. As house prices fall, there is absolutely no incentive to buy. Most are waiting for house price falls to end.

7. Volatility of UK Housing Market.

The UK housing market suffers from severe resource constraints as a % of the total housing stock. The amount of new houses built is relatively small. Therefore a change popular magnifies any change in price. It takes merely a small rise popular to increase prices. But likewise it might only take a little fall popular to cause significant price falls such as 1991.

8. UK Sensitive to any Change in Interest Rates.

There are record degrees of consumer borrowing in the UK. That is a combination of mortgage loan borrowing and personal personal debt like bank cards. The total level of personal debt is 1. 168 trillion. Source (3) Therefore a good modest rise in rates of interest could employ a adverse influence on consumer self-confidence and spending. Therefore the housing market is particularly vulnerable to any rise in interest rates that may occur. - even if it is merely through an upsurge in lender rates (as opposed to base rates). Also, even although Bank of England have cut interest levels, many homeowners are not discovering these rate slices transferred onto them. Home loan costs have been stubbornly high.

Living costs are also been squeezed by olive oil, electricity and food prices.

9. Predictions for House Prices UK.

Many economists predict significant house price falls. For example Mr Calverley, argues in his publication, 'Bubbles as well as how to endure them', that house prices could land by 50%. Ex - advisor to Gordon Brown David Kilometers also predicts falls in house prices. He details that much of the rising demand for casing is speculative. As David Kilometers states

"However, 1 / 3 to one 50 % reflects changes in expected house price inflation - that is clearly a speculative element of demand, which may very well be volatile, "

See also: (economists anticipate 20% fall in prices)

10. Sub Prime Mortgage collapse

The problems in the US Housing Market have adversely influenced investor self confidence. Therefore, it is becoming more difficult to sell mortgage debt. It is likely banks can be more traditional in mortgage lending. See: Credit Turmoil explained

11. Northern Rock and roll and effect on consumer Confidence

The problems at Northern Rock, HBOS and the general malaise in the mortgage loan industry have seriously dented consumer self confidence in the Mortgage loan industry and consumer confidence

House price falls are necessary for the housing marketplace to readjust. However, in the short term, this adjustment is been exacerbated by the lack of mortgage fund.

demand and offer for housing

The determination of prices in local and regional housing markets is a vintage example of microeconomics doing his thing! We are discovering the connections between buyer and retailer with prices on offer and agreed before a final transaction is made. In such a section we focus on the demand and supply area factors that determine the value of properties in a market.

Each housing transaction in the united kingdom depends on

(a) The purchase price that the seller is willing to agree for his or her property with the prospective buyer

(b) Some of the price that the customer is inclined and in a position to pay.

Buyers place offers for a house that owner can either admit or reject

A Sellers Market

When the marketplace demand for properties in a specific area is high so when there's a lack of good quality properties (i. e. supply is scarce) then the balance of power in the market shifts towards owner. It is because there may very well be excess demand searching for good properties. Sellers can await offers on their property to reach (or exceed) their least selling price.

A Potential buyers Market

Conversely when demand both for new and more aged housing is fragile and when there's a glut of properties available on the market, then the vitality switches to potential buyers. They have a much wider choice of housing available and they should be able to negotiate a cost that is lower than the published price.

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When the demand for houses in a specific area improves (perhaps because of the inflow of society in to the area, or a rise in incomes following a street to redemption in unemployment), there may be upwards pressure on market prices.

Often the way to obtain available housing on the market is relatively inelastic. It is because there are time lags between an alteration in cost and a rise in the way to obtain new properties becoming available, or other homeowners deciding to place their properties onto the marketplace.

When demand shifts outwards and offer is inelastic the result is a huge rise in market price and a comparatively small growth of the number of houses bought and sold. As resource becomes more stretchy over time, presuming the conditions of demand stay unchanged, we expect to see downward pressure on prices and a further increase in the equilibrium quantity of houses bought and sold.

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The Aggregate Demand for Casing in the UK

The market for owner-occupied property is hypersensitive to changes in market demand and supply. The effectiveness of these factors often talks about disparities in house price inflation between and within the major parts of the United Kingdom.

Demand conditions for casing influence both willingness and ability of people to make house purchases. Some of the most crucial conditions of demand are outlined below

Growth of real incomes - privately owned housing is a standard best for most people. As average living requirements rise, the total demand for cover expands, as does indeed the demand for more expensive properties as people turn to move "up market".

Consumer self-assurance - assurance is vital in the cover sector. If objectives for future years performance of the market deteriorate and people become less positive about their own financial circumstances, these are enticed to curtail their visit a new home or wait entry into the owner-occupied sector.

Equally when the overall economy is enjoying suffered growth and rising prosperity - increased confidence raises the amount of home customers and shifts the balance of power in the market towards owner if properties are an issue.

Jobs - because financing a house purchase requires making a long-term commitment through a mortgage lender, changes in unemployment levels exert a substantial impact on enclosure demand. For instance in areas when unemployment remains persistently above the countrywide average, average incomes will tend to be lower and assurance among potential buyers will be negatively affected

These three factors, incomes, employment and self confidence are critical in determining the course of house prices. When these three factors are rising the conditions are usually in place for sharp upwards activities in prices. However other economic variables also come into play.

Expectations of future price movements - is casing to be regarded as a consumer durable that provides a circulation of services to the dog owner over an extended period? Or should we think of a residence purchase, as a major financial investment that we expect will provide us with substantial capital gains in the long run? The answer is probably a variety of both! Certainly in the 1980s the enclosure sector boomed due to a strong speculative demand for properties.

Changes to the system of housing fees and subsidies - authorities policies influence the property sector in an array of different ways which range from benefits for council taxpayers on low incomes to the payment of stamp obligation on the priciest properties.

Throughout most of the 1980s and 1990s the federal government offered home purchasers an explicit subsidy in the form of mortgage interest comfort at source or MIRAS. Chancellor Brown decided to step this subsidy from the system - MIRAS has now disappeared. The effect has been to dampen down cover demand, but do little large to avoid house prices rising.

Factors That impact House Prices in UK


Graph shows volatility of UK House prices

House prices are afflicted by a combination of resource and demand factors.

Demand Part Factors:

1. Economic Progress / Real income.

Rising incomes enable people to spend more on buying a house. Traditionally, there is a mortgage percentage of three times your salary. Essentially if you earnt 20, 000 the building population would lead 60, 000. Therefore rising incomes allow house prices to rise.

However, the proportion of house prices to income may differ considerably. For instance, between 1995 and 2007, the percentage of house prices to earnings have increased significantly. see: House Price to Earnings ratios

If the market switches into a recession and unemployment rises, the demand for buying houses would land significantly.

2. Interest levels.

Interest rates impact the expense of paying for a home loan. Interest rates are incredibly important as mortgage repayments are usually the biggest part of a homeowner's every month spending.

In the UK, the majority of homeowners have a variable mortgage this means an increase in rates will cause the price tag on mortgages to go up, detering visitors to buy.

People on permanent rate mortgages will be insulated from fluctuating rates for 2-10 years. Therefore changes in interest rates can have a period lag of upto 18months before there full impact is mentioned on demand for property.

It is also important to consider real rates of interest (interest rates-inflation)

The Bank or investment company of England collection base rates and these usually have an impact on all commercial rates. However, sometimes the lender of England trim interest levels, but, commercial lenders don't pass these slashes onto consumers. In the first half of 2008, the Bank of England trim rates by 0. 5% from 5. 5 to 5. 0%, but the cost of mortgages is still rising.

3. Consumer confidence

During times of high consumer self confidence, people will be more willing to obtain risky home loans to have the ability to buy a residence. For example, in the period 2001-07 100% home loans and interest only mortgage loans were quite common. In the first 00s, people were positive about the housing market and so had taken out mortgage loans with an increased personal debt to income ratio.

4. Option of Mortgage Finance

In the 50s, 60s and 70s, there were stringent constraints about the option of financing. However, with deregulation of the banking sector increased competition has seen a rise in the number of mortgage loan products. Products such as interest only, self qualification mortgages and mortgage loans up to 6 times income have allowed people to get more mortgages, therefore increasing demand for housing. However, through the market meltdown of 2008, the number of mortgage products on offer fell anticipated to a shortage of money in the amount of money markets.


5. Demographic factors

There has been a rising number of households in the united kingdom. The amount of households can grow faster than the populace if the common family size drop and there are more sole people living alone.

Demand for casing in the united kingdom has been increasing for various reasons such as

an upsurge in divorce rates

an upsurge in world wide web immigration from Eastern Europe.

Increase in life expectancy plus more old solitary people

Children departing home early

Less marriage

6. Speculation

Not everyone will buy a house to reside in it. A growing variety of property shareholders buy houses to try and make both capital profits and income from booking. This buy to let investor is normally more volatile, they will buy when house prices are increasing and sell when the marketplace appears to transform. This makes house prices more volatile because speculators will buy in a growth and sell in a bust. The number of buy to let traders in the united kingdom has risen in the past decade.

However, there are very high set costs in offering a residence, such as stamp work and property agent fees. It is not like dealing in stocks where you may easily trade. Many buy to let shareholders claim they can be in in for the long term.

The price of rented accommodation

Although UK house prices have increased faster than inflation, booking in addition has become expensive which is the main substitute to buying a house

7. Inherited wealth.

Many people use inherited prosperity to buy properties. This might demonstrate why there's been rising ratios of house price to earnings. Additionally it is becoming more common for parents to give children a deposit to help get their first house. Quite simply higher house prices are not detering folks from buying a residence - people are finding ways around it.

8. Unemployment

Low unemployment is often associated with growing demand for houses.

Supply aspect Factors

In the short run Way to obtain housing is fixed because it does take time to build residences. Therefore in the brief run demand affects prices more than supply

However if the way to obtain real estate is inelastic then a rise in demand will lead to a major increase in price.

Long Run Supply

In the long term the supply of housing is afflicted by many factors:

Availability of planning authorization. That is difficult to obtain in rural areas

Opportunity cost for contractors e. g. are there better results from other styles of investment

Existing homes may be knocked down because they are regarded unfit to live in.

An upsurge in the price tag on building new properties will shift source to the left

In the united kingdom, it is argued there's a significant shortage of casing is this clarifies why house prices have increased considerably faster than inflation and earnings. However, in the US, the way to obtain casing increased in the time upto 2008 and therefore, the excess source and slipping demand resulted in a big street to redemption popular. However, it's important to note that house prices can still fall, even when there is a lack of source. In 1992, house prices in London fell over 20%, even though we can say supply is inelastic. A scarcity of resource just means they will be typically higher. It doesn't mean they may be incapable of dropping.

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