Factors Influencing Price of Private Rental Housing in UK
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This report delves into the factors that influence the price of private rental housing in the UK, using supply and demand analysis. It also examines the impact of economic and governmental policies on the demand for rental houses.
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Table of Contents INTRODUCTION...........................................................................................................................3 Identifying main factors for determining price of the private rental housing in UK with use of supply and the demand analysis..................................................................................................3 TASK 2..........................................................................................................................................11 Explaining and identifying major governmental and the economic policies which could be utilised for influencing demand for the private rental housing within UK................................11 CONCLUSION..............................................................................................................................13 REFERENCES................................................................................................................................1
INTRODUCTION In the current times, high level of emphasis is placed on undertaking economic concepts with the motive to identify or develop suitable relationship between society, public and private administration. Households who reside in UK, in relation to private rented sector increased from 2.8 to 4.5 million (UK private rented sector: 2018, 2020). In this, the present report will provide deeper insight about the factors that influences price of rental housing in UK referring demand & supply analysis. Further, it will also develop understanding about governmental and economic policies that have an impact on the demand for rental houses. Identifying main factors for determining price of the private rental housing in UK with use of supply and the demand analysis Housing market highly relies on the supply and the demand analysis. High demand and the low supplies causes increase in the prices whereas prices fall at the time when the demand is low and the supply is large of the homes on market Lower rate of interest impacts the demand, however, natural disasters; lack of available lots, changing lifestyles heavily affects the supplies. Law of the demand and supply is stated as an economic principle which reflects a relationship between demand and supply for the products & services. The theory regarding demand and supply is seen as basic principle in an economics. Housing market is affected by state of an economy, real income, changes in population size and interest rates. Along with these demand related factors, prices of private rental housing would be identified by an available supply. In consideration with periods of rising demand and a limited supply, it would be seen that prices of house will rise in addition with increased rent and risk of the homelessness. Increase in demand
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The graph shows that in case the prices rise with doubled amount, it resulted a limited or little increase in the supply. On the other hand, there occurs a significant increase in the demand because of the lower rate of interest, rising population, higher availability of the mortgage, positive growth in economy and the confidence that housing market is seen as the good investment. The main factors that are taken into consideration at the time ofdetermining the rental prices of house enumerated below: Economic growth-John Sloman,Dean Garratt,Jon Guest, Elizabeth Jones (2016) stated that income is the main factor on which the demand for private rental housing is dependent. As with higher or rising economic growth and increased income, people would prefer for spending more and more on the houses that in turn increases demand with rise in price. In accordance to the fact, demand for the housing often noted as income elastic with respect to luxury goods as with rising income, an individual spends huge proportion on houses. However, in recession,
declining income depicts people cannot afford to purchase and with those who had lose their respective jobs might fall behind their mortgage payments and in ending up with home repossessed. Unemployment-Inrelationtothisfactor,ithasbeenstatedthatwithrising unemployment, very few people would able to afford for private rental property. Even fear relating to unemployment might discourage the people from being entered into the property market. Interest rates- It is the factor that affects cost in relation to monthly mortgage payments. High interest rate period would increase the cost relating to mortgage payments that results in lower demand for purchasing the house. Higher rate of interest makes a renting more and more attractive in comparison to buying. Rate of interest have bigger effect in case the homeowners having large mortgage variables. For instance- in the year 1990-92, rise in the interest rate leads to very steep decline in the prices of UK houses as many of the homeowners cannot afford rise or increase in the interest rates. Consumer confidence- It is an essential factor in determining preference of people in relation to taking risk for mortgage. Particularly, expectation towards a housing market is seen as crucial in case people fear that prices of the house could decline in future and this results to defer buying. Availability of Mortgage- In boom period that lies between 1996-2006, most of the banks UK showed a keen interest in lending mortgages. Banks allowed the people in borrowing huge income multiples that is four times income. Moreover, banks need very low amount of deposits and this ease in getting mortgage meant as demand for the housing increases as higher people will be able to buy it. On the other side,Parkin, Powell & Matthews (2015),since a credit bunch resulted in 2007, building societies and the banks struggled in raising the funds for the purpose of lending on money markets. Thus, banks had tightened the criteria for lending as requiring huge deposits for purchasing or buying the house. This reduced an availability of the mortgages and the demand for rental housing falls. Population- It is the most critical factor as it just not reflects number of people but also the demographic changes. For example- growing or increase in number of the single people who lives alone led to increased demand for the houses.
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Demand for rental housing not only depends on population but also on average household size. Certain demographic and the social factors causing an increase in no. of households with a faster pace than increase in population. Such demographic changes involve issues like age of the people who are leaving home. Increased level of life expectancy results to more single old age people and rising divorce rates leads to increasing number of the single parent family. Renting cost- It has been seen that despite of the financial crisis and the housing crash, cost of renting increases by 22% , this helped in causing rise in the UK house prices.
The above graph shows that if renting cost increases, then the households would make a greater effort in buying the house as purchasing the house by taking mortgage becomes as relatively cheaper. The housing market of UK has been buoyed by an expensive cost of renting that encourages buy for letting and encouraging lenders to stretch their respective budgets for getting on housing ladder. Affordability- Ratio regarding house prices to the earnings influences demand. As the price of the house rises relating to an income, very few people would be expected to afford rent of private house.
The other way to look at affordability of the housing is the percentage to take home pay which is been spent on the mortgages. This considers house prices mainly interest rates as well as monthly cost of the mortgage payments (Factors influencing price. 2017). In the late 1989, private housing rent had become as unaffordable due to increase in interest rates. This resulted a fall in the prices of housing rent with decrease in the demand for private rental property. Supply- Shortage in supply leads to rise in prices and excess of supply would cause a fall in the prices of rental housing. For instance- In Irish property, at the time of boom period, estimated 700000 newer houses were being built. At times, when collapse of property market occurred, market had been left with the fundamental oversupply. Rates of vacancy reached to 15% and with higher supply than demand, prices dropped by 50% of Irish house. Contrasting, in UK, housing supply falls behind the demand and with shortage, prices of UK houses doesn't fall much in Ireland and is recovered on an early basis instead of an ongoing crunch in credit. Supply of housing mainly depends on an existing stock and the new house building. Supply of the housing seen as quite inelastic as for getting planning permission and building the houses counted as a time-consuming task. Increased house prices periods might not
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cause equivalent rise in the supply specially in the countries like UK, where limited land is available for building home. TASK 2 Explaining and identifying major governmental and the economic policies which could be utilised for influencing demand for the private rental housing within UK Assessing the need of housing and the demand feed into a national and local planning policy which in turn has great impact on supply and the demand of housing. Under the past labour government, demand for private rental housing was computed at the national level and the housing targets were being set for every regional authority. Currently, government abolished the regional planning and targets, however, local authorities had to set aside sufficient land for satisfying the housing demand. The government had not produced for a statutory guidance on methods that has been used for calculating need of housing. On the other side,Griffiths A and Wall S (2011),estimates are required to evidence by approved planning authority or inspector. Government encouraged an interested party in an industry for preparing their guidance on the housing need for the planning authorities. UK government replaced majority of the past planning guidance with that of the new national planning policy framework that is published in the month of March in year 2012. Planning policies and an application has to be identified or determined according toNPRFuntil and unless the material considerations are indicated otherwise. This policy gives some guidance to the local authorities about housing supply for boosting demand of rental housing. Moreover,interest rate policyhas been introduced by the government where lower rate of interest is being charged to the person who are taking loan for rental housing. This also increase demand for private rental property as the people will be getting the loan at lower interest rate and this tends to induce the person to buy for rental property. Greater level of flexibility in the planning- In UK it has been seen that the planning restrictions e are strict. Loosening number of the restrictions and making easier for the builders would result in increasing the supply. This can include reducing an amount of the protected green land. It also includes streamlining regulations of the home builders that has to be meeting. Incentives for the local authorities- Building rental property house seems as local issue within which local authorities has to deal with an opposition of the home building, therefore it is often a political pressure in stopping building of house. However, greater amount of financial
incentiveslikeallowingcouncilforkeepingthetaxreceiptsfromthenewerhousing developments that could facilitate them with greater motivation in allowing building of home. Increase in immigration: By doing assessment, it has found that in UK foreign migrants have lower ownership rate. This in turn has direct impact on demand pertaining to private rental housing. Further, condition related to positive net migration also has significant impact on both price and rental aspect (Migrants and Housing in the UK: Experiences and Impacts, 2020). In the case of unbalanced situation about demand and supply results into shortage of housing. Discouraging buying To-let or the second homes- In the recent years, there are large number of the homes owned by residents has been fallen. There has seen a rise in buying To-let properties and the people with the second homes. Such source of the demand stated as factor in pushing the prices upward. On one hand, a single policy would provide disincentives for buying to let and housing an investment. This include higher rate of taxation on the second homes by way of reducing the demand from this sector, housing prices would see as more and more affordable for the buyers of the home. Introduction of planning a gaining supplement scheme- At moment, building the new houses tend to provide a greatest advantage to the landowners. Residents who are local feel that they are just losing out the depressed prices of house, loss of a unique village etc. One of the solutions has been introduced in making the local residents sure who lives near the schemes of new housing for gaining some of the compensation in return in order to accept for more houses. For example- new development in housing can be accompanied with bypass or the better link with public transport. This is seen as interesting from economic perspective as it seeks in providing pareto improvement. Government help in buying andcouncil homes or government subsidy– It has been represented that government enables people in buying new schemes for easing problem and helping the homeowners in borrowing more amount of money. Critics have argued that merely the fuel demand keeps the prices artificially very high. On the other hand, up-to some extent, helps in buying new schemes provided some of the incentive for the private builders in increasing the demand and the supply. Specifically, first part of a scheme offers buyers a loan that is interest free equating to 20% of value of new home. This had increased demand for new home building and private rent housing which in turn encourages the house builders as they are confident regarding demand for a new home. The other aspect of a scheme assists the home
buyers in gaining mortgage guarantee for buying house with just a deposit of 5% that has been criticised for fuelling an increase in the prices of house and might scaled back. Additional spending of government for subsiding building of the social housing helps in increasing the demand. In the past decades, housing council fallen out of the vogue as government had sought for selling off the council housing and cutting back on building of a council housing. It was the council houses that provided significant level of boost in UK housing stock in post period of war. In the recent years, the local authority in building for new houses has been ceased virtually (IMF regulations,2018). It is being notable since the local authorities has ceased for building the homes where shortage in UK housing become as more acute. Association of housing had never been able for replacing large numbers that are built by the local authorities. It will require change in the political commitment and willingness in spending extra amount of money. Also, notion of the council housing has been gained as a form of the social stigma. On other note, it would make big difference in building number of homes.With the motive to arise demand for private rental housing in UK government introduced Housing & Planning Act. Through this, government emphasizes on monitoring poor working management practices undertaken by landlords. On the basis of this, government imposes penalties on landlords which in turn ensure appropriate tenancy agreement. In this way, government policies also resulted into increase in demand pertaining to private rental housing. CONCLUSION By summing up this report, it can be concluded that UK private rental housing market highly affected from both the aspects namely demand and supply. It can be seen in the report that there are several factors which highly impactsUK rental housing market. This includes economic growth, unemployment, interest rates, affordability etc. Besides this, it can be inferred from the evaluation that both government and economic policies containing interest rates, taxation, immigration etc influences demand factor.
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REFERENCES Books and journals Griffiths A and Wall S (2011): economics for Business and Mana Pearson John Sloman, Dean Garratt, Jon Guest, Elizabeth Jones (2016) Parkin, Powell & Matthews (2015): Economics 9thEdition. Pearson Online Factorsinfluencingprice.2017.[Online].Available through:<https://www.economicshelp.org/blog/9465/housing/factors-affect-cost-private- renting/> Migrants and Housing in the UK: Experiences and Impacts. 2020. [Online]. Available through: <https://migrationobservatory.ox.ac.uk/resources/briefings/migrants-and-housing-in-the-uk- experiences-and-impacts/#kp1> IMF regulations. 2018. [Online]. Available through: <www.imf.org>The International Monetary Fund, useful for international economic information and policy other than that you can use Economics online pettinger UKprivaterentedsector:2018.2020.[Online].Availablethrough:< https://www.ons.gov.uk/economy/inflationandpriceindices/articles/ukprivaterentedsector/ 2018 > 1