The Economic Determinants Of House Price Essay


Discuss the economic determinants of house price and use this understanding to discuss house price trends in the UK since 1980. Based on these findings and expectations for the macroeconomy.


House prices in uk

  • The rise and fall

Housing prices analysed for the period 1980-2013 reflect that 2009 saw the biggest fall of 7.6 % and since then house prices have started to climb again and the past 12 months have seen the second highest inflation in property since 1980. According to office for national statistics (ons), 1988 recorded the biggest house price growth, although house prices have risen almost as quickly in 2014 also since 1980. Analysis say (baum & baum, 2015) of the house price data has shown that prices in the uk fell annually only in seven of the last 34 years, otherwise property values have been increasing at an average of 6.9% every year since 1980 and have reached to an average price of ?242,000 in 2013.

  • Reasons

An analysis by report has shown two main reasons for the declining rate of first-time home owners – the rising costs and the shrinking savings. Ons has also confirmed this as the statistics show that last year’s price rises are second only to the ones in 1988, when the price of a home had risen by over 12%. The latest ons data shows that the average price of a home in the uk stands at ?271,000 and this is 10% higher than the corresponding price a year ago (erp & akkermans (ed), 2012).

  • First-time buyers

The factors discussed above in this paper have also been confirmed by the housing charity major shelter ( which has stated that first-time buyers have to save for a decade for the initial deposit. This has also been seconded by a report of ons which states that property ownership of first-time buyers has shown a steep decline during the period 1980-2013. Up till 2002 of this period, first-time buyers’ recorded 486,000 number of mortgages each year, but the number sharply fell after that, especially in 2003, when it recorded fall of 31% and it touched the highest fall in 2008 at 47% (baum, 2009).

  • Factors for decline

This paper found that 67% in the 25-34 age group were homeowners in 1991 and this slumped to 43% by 2012. In the age group 16-24, 36% were owners of a home in 1991, which went down to 10% in 2012. The only steady age group was 35-44 year which slumped from 78% to 64% for the corresponding period. This paper analysed that the biggest factor for the steep fall was the initial deposit requirement for securing a mortgage and this is also confirmed by the ons. Analysis by this paper have shown that the deposit amount, as a percentage of the purchase price, has increased by 10% between 1988 and 2013, going upward from 12% to 22% for first-time buyers (sexton & bogusz, 2013).

Affordability of housing in uk

  • Factors affecting affordability

A report from housing charity major shelter has shown that in 70% of counties across uk it takes a young household more than a decade to save for the 20% deposit amount. However, in london, says (myers, 2012), it takes couples almost 26 years before they have save enough for the deposit and single people spend 29 years waiting because of the escalating prices. This paper also came across instances where those trying to buy a house of their own had to save one-fifth of their income after essential spending and tax.

  • Reasons

All this is happening despite the help to buy scheme of the government launched in 2013, which requires a deposit of only 5% for first-time buyers. Although a report by the council for mortgage lenders shows that 300,000 first-time buyers made use of the scheme, making it the highest number since 2007. This paper also came across that mortgages worth ?205.6billion were executed last year, making it the largest lending amount since 2008 (kao, sung & chen (ed), 2014).

  • The decline

According to a bank of england report lenders are less willing to lend to those buyers which deposit less than 10%. But this paper has researched that because of 10-year fixes becoming available at just 2.94%, more first-time buyers will commit for long-term borrowings. This becomes important in the wake of data from ons which shows that price for a house, paid by a first-time buyer, was up by 11% to ?208,000 as compared to last year (megarry et al, 2012).

Interest rates on borrowings in uk

Although bank of england has lowered the standard variable rates, it has not reduced the base rates which continue to remain at 0.5%. Despite low interest rates, many first-time buyers felt restricted to afford a mortgage because of the falling monthly disposable incomes after they take care of their taxes, rent, bills and other loan instalments. Nearly 29% of them have experienced that their debt payments had gone up in the past two years because of the rising costs and high lending rate (mcfarlane, hopkins & nield, 2012).

Supply of housing in uk

As per the research done by this paper, uk requires 250,000 new houses every year to fulfil the growing demand. This study has revealed that this should comprise of 125,000 houses at the market price, 50,000 houses at intermediate prices, including the ones available at affordable rentals or under shared-ownership and 75,000 houses for social renters. Against this pending demand, availability is just 50% and the number of affordable houses has fallen sharply. Apart from this, the main concern of the government should be the steep shortage in the social housing segment, which has gone down by over 66% since 2010. Although completion of new houses has increased to 31,130 dwellings in the third quarter, in the same period, the start of building new houses fell to 33,000 (fair & raymond (ed), 2013).

Policies will not stop house price rises

The studies undertaken by this paper have shown that the government’s initiative of supporting home ownership and building new houses shall fail to create any real impact in 2016, if the property prices in uk keep climbing. Of the 88 respondents contacted by through this study concerning a general fall in prices in 2016, only 54 were of the view that current policies can create any impact or could succeed in increasing the demand. Even the sympathetic respondents were of the view that these measures shall only scratch the surface of the fundamental problem being faced by first-time buyers (karadimitrio, magalhaes & verhage, 2013).

  • Reasons

To further give boost to the help to buy scheme, the chancellor has announced a lowered 3% stamp duty surcharge from april on all houses bought to let and also for second home buyers, while promising new affordable homes to people in london. However, economists are not expecting any change in the buyer’s trend from the government promises. One bright ray of hope comes from ryan bourne, public policy head at the institute of economic affairs. He expects the prices to stabilise in 2016 but was of the view that they were still higher and attributed this to the fact that it was because of a restricted supply position. This paper is also of the opinion that the damage could take a generation to rectify, as the new buildings required would take a long time for a stable market to emerge and make ownership affordable (sexton & bogusz, 2013).

  • Current impact

Mr. Ethan ilzetzki, a respondent and lecturer at london school of economics, expressed view that the recent announcements by the government were a pittance on the supply side and shall prove to be highly inefficient subsidies for boosting the housing demand. He was of the opinion that the current policies of the government shall act as subsidies to the existing homeowners and will not benefit new buyers. This paper agrees with his contention expressed by (ashworth & perera, 2015) that the promised 400,000 new affordable houses being started by the government and private sector are not sufficient to fulfil the demand of the growing population’s needs and with no meaningful increase in supply, such measures shall translate into escalation of housing prices.

This paper is of the opinion that as prices are expected to rise faster than incomes, none of the initiatives being promoted by the administration are expected to usher in the double-digit increase in housing fulfilment for new buyers in the coming years. Many respondents also opined that a small increase in interest rates could further dampen the buying spirit of new buyers. It is expected that only the top end london property market, where prices can be hit by a threat of brexit, a reduced interest from foreign investors and a higher level of stamp duty, is where it is expected to meet the demand (baum, 2009).

  • Future growth

Looking at the future growth, nick bosanquet, a professor at imperial, was of the opinion that there was the mooted risk of collapse in the buy to let segment although it was a small segment of investors. But he also warned of a bubble risk in one specific area – and this concerned the flats in the london riverside area where a large number of new units are under construction and are expected to be off-loaded to the market in the next 18 months. In the opinion of this paper, (megarry et al, 2012), this may further reduce the demand by 20 to 30% because of reduced foreign demand and this paper suggests that the government should not take this as a housing crisis and undertake action which may lead to more market instability. Under the changed scenario which when looked upon in its totality found some sympathisers for the government such as mr. J. Chadha, professor of economics at university of kent, who said that the recent government policies was a step in the right direction but also opined that houses were still very expensive for the ordinary people living below the median incomes. Among the analysts, says (ashworth & perera, 2015), criticism also stemmed from kate barker, a former member of monetary policy committee of bank of england, who chaired a 2004 report of the bank on housing supply, was of the opinion that it would be surprising if the current policies would be able to generate any new supply in the near future. However, she saw a brighter side of the policies as these could encourage future investment in construction skills and materials.

Uk house prices set to rise 25% in next five years

The royal institution of chartered surveyors (rics) has predicted that house prices in the uk shall rise by 25% over the coming five years and can become more unaffordable for new buyers and this can create acute shortage of houses for sale. Even this paper is of the view that as predicted by rics the supply of homes for sale had also fallen to the lowest level since the agency started keeping records beginning january 1978. The markets failed to capitalise on the post-general election supply increase so much so that the north-west and london saw the biggest drop in demand since april this year, as per (ashworth & perera, 2015).

Rics has also predicted that the average stock of houses has gone down by 12% since the beginning of 2015. On the other hand, inquiries from new buyers are increasing and are at their fastest rate in the current period. This has also been evident from the market reports which reported an increase in the house prices in may and this increase was at a faster rate as compared to the increase in april. Study by this paper suggests that prices are bound to rise again in the near future as the market is upbeat because of the majority conservative government at the helm of affairs is in a better position to govern effectively assert (mcfarlane, hopkins & nield, 2012).

Boom conditions are expected to return to the housing market and this sentiment is echoed by mr. Martin ellis, housing economist with halifax, who is apprehensive of an extremely tight housing supply in the coming months. According to ellis, this imbalance between demand and supply shall continue to push-up prices of houses in all segments and sectors in the coming months. On the basis of the studies conducted by this paper, it is expected that the average price of a house in the uk shall be around ?195,000 in the near future (erp & akkermans (ed), 2012).

The theory of this paper is also supported by mr. Simon rubinsohn, who is the chief economist with rics. According to him there was some hope that with the removal of the political uncertainty in the country, the market will get the opportunity of more properties, although the initial indications do not indicate any such development at present. In the opinion of this paper, however, it is too early to make any judgement on the future trend of the market. The continuous rise in the market, across all segments, is therefore hardly surprising and the speculative nature of this trade shall keep the property market at a high level of unaffordability (kao, sung & chen (ed), 2014).

This paper also agrees with simon when he adds that there is feedback from members pointing to prices which could be higher by 25% over the coming five years. He was of the opinion that sentiments among the members suggested little or no confidence in the government’s effective measures for providing a major boost to a new supply policy. Quoting another chartered surveyor from ashford, surrey, frost partnership, a member of rics, it has been predicted that listings were in short supply and this was pushing up housing prices to unrealistic levels (myers, 2012). Another rics member, curzon land, operating in central london and specialising in prime property investments, represented through its owner mr. Christopher green that the markets were very upbeat after the election result and that the market was filled with immense optimism because of the removal of the socialist for the next five years. Though, these indicate bad news for tenants. Market leaders are predicting a steep rise in rentals, which may be in the range of 3% in the coming year. The body was optimistic that this reflected a trend that demand for rental properties shall continue to increase. This paper also anticipates that rentals will increase across all sections of the uk in the near future, with expectations to be most high in the east midlands (baum & baum, 2015).

List of references

Ashworth, a. And perera, s. 2015 cost studies of buildings, 6th ed. Routledge, oxon.

Baum, a. 2009 commercial real estate investment. Taylor & francis, london.

Baum, a. And baum, prof a. 2015 real estate investment: a strategic approach, 3rd ed. Routledge, oxon.

Erp, sjef van and akkermans, bram (ed). 2012 cases, materials and text on property law. Bloomsbury publishing, london.

Fair, d.e. And raymond, r.j. (ed). 2013 the competitiveness of financial institutions and centres in europe. Springer science & business media, dordrecht.

Goodhart, c. And hofmann, b. 2007 house prices and the macroeconomy: implications for banking and price stability. Oup oxford, oxford.

Kao, j.c.m., sung, w. And chen, r. (ed). 2014 green building, materials and civil engineering. Crc press, london.

Karadimitrio, n., magalhaes, c. And verhage, r. 2013 planning, risk, and property development: urban regeneration in the england, france, and the netherlands. Routledge, oxon.

Mcfarlane, ben, hopkins, nicholas and nield, sarah. 2012 land law: text, cases, and materials. Oxford university press, oxford.

Megarry, robert, wade, william, harpum, charles, bridge, stuart and dixon, martin j. 2012 the law of real property, 8th ed. Sweet & maxwell, new york.

Myers, d. 2012 economics and property. Taylor & francis, london.

Sexton, roger and bogusz, barbara. 2013 complete land law: text, cases, and materials oxford university press, oxford.

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