Factors Affecting Rental Housing Prices in the UK

This document discusses the factors that determine rental housing prices in the UK using demand and supply analysis. It explores the impact of government and economic policies on the demand for private rental housing.

ECONOMICS FOR BUSINESS

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Identifying the factors to determine prices of the rental housing using demand and supply in
the UK. ........................................................................................................................................1
Task 2...............................................................................................................................................5
Governmental and economic policies that can influence the demand of private rental housing
in UK............................................................................................................................................5
CONCLUSIONS .............................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Economics refers to study related to production, distribution as well consumption. It
consists of two parts mainly that are macro and microeconomics. Macroeconomics deal with the
whole on aggregate basis where microeconomics deals with smaller context on individual basis.
Supply and demand are interrelated with each other and is concerned with the study of
interactions between the buyers and sellers for determining prices and quantities of goods. Study
is related with the study of rental housing in UK. It is concerned with the demand and supply of
private rental housing in UK. This is also concerned with the policies adopted by government for
promoting the private rental housing in UK.
TASK 1
Identifying the factors to determine prices of the rental housing using demand and supply in the
UK.
Fundamental problem with the rental housing market of UK is the persistent shortage of
houses to rent. Quantity of households in private rental sector have increases in UK fro 2.8
millions in 2007 to 4.5 millions till 2017, that is increase of 63% (1.7 million) in ten years.
Young households more likely are giving their properties on private rent as compared with the
older houses. Properties with the age group of 25- 34 years have the largest group. In private
renting sector households are becoming older in between 2007-2017, proportions of households
reference the people ageing 45-54 have raised from 11 % to 16%.
In economics efficient allocations of resources require that prices in long run are
determined balance between demand and supply. The same rule applies in the housing market
also, where supply of the houses determine the rental prices and demand for houses determine
prices. In private rental housing market prices are determined considering factors that influence
housing stock, availability of houses for rent and cost of building homes (Okoro and et.al., 2017).
Demand for the housing are determined by the needs raised due to demographic developments,
ability of paying and desire of purchasing new house. Prices of rentals similar to binds and
stocks also depend highly over law of demands and supplies.
Demand
Demand demonstrates that people will not be having no or lower demand for goods
having higher prices. This happens when the factors related to this are equal. Consumers tends to
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sacrifice something which comes at higher cost and curbs demand. Likewise low price drive
demand as consumers purchases things when they are relatively cheaper.
Market demand for private rental housing has been presented in below figure. This is
known as market demand curve as it reflects choices of households in economy. In
macroeconomics markets are taken on aggregate basis rather than individual basis.
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As price of the rental housing decreases, quantity demanded is increasing . It states with
the decrease in prices more consumers choose for buying positive quantity instead of zero. Prices
of goods decrease , larger quantity is bought by the individuals. In the rental housing as prices
will go down more would be able to afford house, so quantity demanded is increased. People
would tend to have more house available on rent.
Supply
As per law of supply the price tend to fall when there is increase in supply of the goods or
services in market. When the prices increase number of service and goods tends to fall. This is
because its tend to have high cost for producing and selling goods at higher prices.
Supply curve is counterpart of demand curve that is derived adding individual supply
curves of the economy. Supply curve slope upwards when prices increase and quantity supplied
also increases in market. When prices are high more parties enter in market producing positive
quantities. Increase in prices tends parties to increase the quantity they are wishing to produce.
Supply depends on various factors such as increase in construction costs, high labour prices,
borrowing costs, change in government regulations and many other factors
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Equilibrium
Supply and demand curve are put together for understanding supply & demand picture in
below figure of Market Equilibrium. This is the point where demand and supply are meeting
equilibrium in market. There is perfect match between number of rental houses available and the
number of people wanting houses on rent. There is balance between demand and supply forces in
market. At the equilibrium prices, people are giving as much houses on rent as they can and
people can have as much as they could have on rent (Kubickova, 2019). There are no
disappointments between the houses and tenants. Demand curve is having negative slope and
supply curve is having positive slope, demand and supply curves will intersect once and
equilibrium quantity and prices will be positive.
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Factors affecting demand and supply of Rental Housing
Rental housing heavily relies over the supply and demand that is prominent part of the
housing industry. There is a buyer and seller in every transaction for housing. Buyer places offer
on property leaving sellers to reject or accept offer. Law of demand and supply dictate
equilibrium price of property (Kapeller and et.al., 2018). When the houses on rent are having
demand and the supply of houses available on rent are low, prices of rents will tend to increase.
Similarly with weaker economy and lower demand for rental housing tends to have lower prices.
It is easier to measure demand and supply in housing market. This is because new homes
take time to construct and also to fix the old one back in the market takes time. Major factors
influencing the demands are low borrowing costs or interest rates. When rates of interest are
lower people tend to make more borrowings. They are able to borrow for construction of new
houses as interest rates do not create burden. When more people are demanding houses on rent
prices tend to rise. Supply of homes is low in UK as against the demand. Where the supply is
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constantly changing. Seeing the demand investors are investing to construct more houses with
the government reliefs and supports.
Supply of the rental units respond only partially to increase in demand due to
construction lags. This causes the rent to increase more frequently in shorter time than in long
run. Supply of the rental units are fixed in short runs driving the prices of rental units higher with
increase in demand at the time of growth in economy (Wilson and et.al., 2018). measuring the
changes in quantity of the rental units captures supply and demand both responses.
Other factors that influence demand are population growth, unemployment rate,
inequality among the rich and poor. Increase in rental prices is increasing the burden of
households. Increase in unemployment decrease demand for the rental units both in high and
lower income markets. This also caused the unemployed to have decreased income in relation
with median income. Higher unemployment reduces demand and prices of the rental housing and
also the burden faced for acquiring the rental units will increase.
Growth of population and density have significant consequences over availability of the
rental units. Increase in population causes the demand to grow and also cost burdened
households as percentage due to increase in households that will compete for limited supply of
the rental units till new units are constructed (Barro, 2019). Communities that are densely
populated tend to have small units to be located closer to each other. Lower per capita income as
households with lower income cannot afford larger land and have small units. The rents of
houses grow with the growth of population due to lower availability of units
Task 2
Governmental and economic policies that can influence the demand of private rental housing in
UK
There are few policies that can affect the demand of private housing rental in UK. A
detailed description is given below.
Economic policies
Interest rate policy
In UK, there is a shortage of affordable private housing which has caused increase in
rent. The decrease in the rate of interest, lowers the rate of borrowing in order to pay for the
house as a result more people are able to buy the house which in turn increases the prices of the
house as the demand increase. On the other hand, as the interest rate increases, the rent of the
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private rental houses increases which is far of reaching owning the own home. The increase in
interest rate may dissuade people form buying their own house (What does interest rate cut mean
for mortgages and savers? 2020). Also, on the fall in interest rate, landlords will not pass the
benefit to the tenants. Apart from this, the rising house prices have also encouraged people to
invest more in houses by buying it. This will result in increase in house prices which will
consequently lead to increase in supply of private rented housing.
Taxation policy
In UK after the enactment of section 24 legislation in 2017, which provides tax relief to
landlords has been phased out and now landlords can only claims 20% which has made many of
them planning to leave the market. Any slowdown in the supply of the private rented housing
will put more pressure on rent (Sloman, Garratt, Guest and Jones, 2016). Also, private landlords
are subject to taxation on rental income and stamp duty tax when they buy the house property
and also now landlords are not able to set off all the finance cost to the rental income. Because
of this, now landlords are required to pay more tax which will influence the demand of supply
and demand of the private rental housing in UK.
Tenants/landlord rights
The demand of private rental housing is influenced by the rights and responsibilities of
the landlord and tenant and also the type of agreement they have. The landlord cannot increase
the rent without any reason as they are required to follow certain rule which defers from
agreement to agreement. Tenant can challenge the landlord in case of disobey of rule. Majorly
the rights stated in the agreement determines and influences the demand of private rental housing
in UK (ANDREW. GILLESPIE, 2019). This policy will have a huge influence on the demand of
private rental housing. The terms of agreement are very complex and difficult then it will affect
the demand of it also, as per the policy landlord cannot treat unfairly, otherwise, strict actions
can be taken. Landlords should enter into long term agreements in order to keep the rental price
constant. If more people enter to buy the house it is increase the price. But this price increase will
have less impact on the houseowners in short term. But renters will be affected with change in
the price in short term. Thus, the agreement and the rights agreed in it will influence the demand
of the private rental housing in UK.
Government policies
Public housing policies
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With the increasing immigration in UK there were shortage of houses because of which
there was in increase in the rent of the houses. Mostly, UK residents were having their own
house and other immigrated people were living on rent because of which government came up
with the Right to buy policy which offers houses to the first time buyers at the discounted prices
which depends upon the time they have lived in the country. Also, government has enforced
Private Housing enforcement policy 2016, which promotes effective inspection with respect to
improving the regulation by giving certain powers (Watt and Minton, 2016). Also, The Housing
and Planning Act, 2016, provides further power to tackle the poor management of house property
by landlords and their agents in the private rented sector. There is a civil penalty policy, under
the above Act, which decides the level of financial penalty in a particular case which will be
determined by the local housing authority. There is an enforcement policy in respect to Housing
Health and Safety Hazard System which assists in tackling the poor housing conditions. All these
policies, have increased the demand for private rental housing which has lead to the increase in
trust on landlord for better housing conditions. As a result, tenants are no more facing any issues
which will lead to increase in demand of private rented housing in UK.
Policies on landlords
The majority of landlords in UK have well maintained house for their tenants and are
committed towards the well being of tenants. As a landlord requires obtaining the license under
three types of licensing which includes mandatory House in Multiple Occupation (HMO),
additional HMO licensing and Selective licensing. If the property falls under any one of these
types then the landlord is required to get relevant licensing. If the landlord falls to get the
required license it will be considered as a criminal offence. Also, before renting the property it
becomes the responsibility of the landlord to ensure that the place is safe for human habitation.
Also, before signing the tenancy agreement, the landlord is required to conduct rent checks,
provide necessary documentation, conduct right to rent immigration check (Huws, 2019). All
these policies implemented by government have a huge impact on the demand and supply of the
private rental housing.
Social Housing policies
This policy provides landlords with more flexibility in respect to the type of tenancy it
can provide to tenants while maintaining the existing rights of the tenants. It has made it easy for
tenants to move within the social sector with help of HomeSwap direct scheme (Soaita, and et.al,
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2017). This policy has allowed the local government authorities to end homelessness duty levied
on the private rental housing even without the consent of the applicant. Along with that
government has introduced affordable rent product which provides housing providers to charge
not more than 80% of local market rent (Power and et.al, 2018). This will help in effective
increase in the supply of the rental houses. Social housing was primarily established by
government to promote the private rental housing. It has launched Localism Act, 2011.
Landlords were facing issues to become more flexible on the various tenancy offer that could be
provided to the tenants. This has provided more flexibility to protect the existing tenancy rights
of people. Government established new policies and procedure giving the councils power for
managing the waiting lists. Government has made it easier for the social tenants for moving
social sectors to introduce national swap scheme. Government has published guidance over
allocation of social housing for accompanying the changes in Localism Act. The social housing
scheme was very useful strategy of government that helped it in promoting the private rental
housing in the market. Social housing is required to be promoted for reducing the rental pricing.
Affordable Housing
Affordable housing is another scheme of government. The rent schemes are provided by
default in private rental housing. Affordable rents & private market rents unit with the
development for managing collectively single build for rent landlord. The government authorities
provide more affordable houses via model of the affordable housing rental scheme. It is also
proposing the housing revenue subsidy about the fair, new, locally control systems where the
local authorities are accountable for the housing services.
The supporting tenants play bigger role for managing the accommodation through
empowerment of tenants. Homes & Communities Agency standards is classified as the consumer
and economics. The registered providers are required to meet the standards only in the private
providers. All the standards are set in Regulatory framework for the social housing in UK.
Regulators are required for promoting social housing in the public investment (Delgado, 2016).
They maintain the confidence in private investors for investing in in the housing sector. The
policies of the government for ensuring that housing is available to future and current trends.
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CONCLUSIONS
From the above report it has been summarised that rental housing demand in the UK
market is much higher than its supply. The prices of rental housing are increasing at constant rate
the construction of houses is not raising as the same pace with that of the growth of populations.
Government has taken number of polices and steps to promote private rental housing. The
schemes adopted by government has helped to grow the supply of rental houses.
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REFERENCES
Books and Journals
Soaita, A.M. And et.al, 2017. Becoming a landlord: Strategies of property-based welfare in the
private rental sector in Great Britain. Housing Studies. 32(5). pp.613-637.
Power, A. and et.al, 2018. Private renting: can social landlords help?.
Watt, P. and Minton, A., 2016. London's housing crisis and its activisms:
Introduction. City. 20(2). pp.204-221.
Huws, C. F., 2019. Tenants’ rights and the Renting Homes (Wales) Act 2016. International
Journal of Housing Policy. 19(4). pp.588-598.
Edwards, M., 2016. The housing crisis and London. City. 20(2). pp.222-237.
Delgado, P.A.A.D.L., 2016. The United Arab Emirates case of economic success: The federal
government economic policies (Doctoral dissertation).
Barro, R.J., 2019. Economic Growth, Convergence, and Government Policies. In Economic
policy, financial markets, and economic growth (pp. 9-28). Routledge.
Wilson, J.Q. and et.al., 2018. American government: Institutions and policies. Cengage
Learning.
Kapeller, J. and et.al., 2018. Government policies and financial crises: mitigation, postponement
or prevention?. Cambridge Journal of Economics.42(2). pp.309-330.
Kubickova, M., 2019. The impact of government policies on destination competitiveness in
developing economies. Current Issues in Tourism.22(6). pp.619-642.
Okoro, A.S. and et.al., 2017. Effects of Fiscal and Monetary Policies on the Nigerian
Manufacturering Sector. Journal of Finance and Investment Analysis.6(1).pp.1-1.
ANDREW. GILLESPIE, 2019. FOUNDATIONS OF ECONOMICS 5E. OXFORD University
Press.
Sloman, J., Garratt, D., Guest, J. and Jones, E., 2016. Economics for business. Pearson
Education.
Online
What does interest rate cut mean for mortgages and savers? 2020. [Online]. Available
Through:< https://www.theguardian.com/money/2020/mar/11/what-does-interest-rate-
cut-mean-for-mortgages-and-savers>.
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