Impact of Demand and Supply on Private Rental Housing in UK

This report presents the impact of demand and supply on the private rental housing market in UK and identifies key factors determining housing prices. It also evaluates the policies that influence the demand for private rental housing.

Economics for Business

EXECUTIVE SUMMARY
This report presents the about the impact of demand and supply on the private rental
housing in UK. The main focus of it is to identify the key factors that helps in determining the
housing price in UK. It also evaluated the various policies that can influence the demand of the
private rental housing. Based on findings, the most important factor is the interest rate and
availability of mortgage.

INTRODUCTION
In UK, currently, 5 million families are residing in the privately rented houses. Based on
the standard set, affordable rent should not be more than 30% of income but across UK it is
slightly above this threshold limit in London and Southern England. The high rental cost has
prevented people from living in or moving to London and Southern England which has created
the shortage of key professionals like nurses, teachers in these regions as a result has limited the
economic and social mobility in UK. This report presents about how the price is determined of
private rental houses in UK. It also includes governmental and other policies which has the
strong influence over the demand for private rental housing in UK.
Task 1
Housing supply and demand
The prices of homes is like stocks which depends upon the law of demand and supply. It
is one of the important principles in economics that establishes a link between the supply and
demand and how it impacts the price of goods. When the demand of the housing increases and
supply of it remains low then it will result into increase in price. On the other hand, if the when
there is low demand of housing then the supply of it will increase which will result into decrease
in price (Hall, 2020). The supply and demand mostly work in against of each other until the point
of equilibrium is reached where the supply and demand of the product intersects. The law of
demand states that there will be no or low demand of product when the price is high assuming all
other factors remain constant. The low price of the product drives demand as consumers will find
value in it and purchase more when it is cheaper. In case of law of demand, there is fall in the
price of the product when the supply of the product increases. But as the price of the product
increases, the supply of the same reduces or dropped.
The housing or the property market depends on the movement of supply and demand and
it is the most prominent industry. It involves buyer who places the offer to buy the property
leaving seller with the option to either accept or reject the offer.
Point of equilibrium

Shift in demand

Shift in supply

From the above it can be said that there has been a shift in both demand and supply
because of the change in factors other than price. During the period between 1998 to 2005, the
house prices in UK nearly doubled. The rise in demand was because of the low interest rates,
growing economy, increasing confidence among customers to enter property market.
Main factors determining the price of the private rental housing in UK
It is not so easy to monitor or measure the movement of demand and supply in the property
market. It is because of the reason that it requires a very long duration for building up the
new homes or fixing the older one and bringing in the market. Some of the factors that
helps in measuring and evaluating the prices of private rental housing in UK are stated
below.
Economic growth and real incomes
The demand of house is mostly dependent upon the income of the consumers. When the
economic growth is higher and the income of the people is increasing, then it will enhance the
ability of the people to expand their expenditure on housing. As a result, it has led to rise in
demand which will lead to hike in prices (Pettinger, 2019). The demand for housing is

considered as income elastic because it is considered to be luxury or precious good and rising
income will result into higher percentage of income will be spend on houses. At the time of
recession, the fall in income of the people will mean that they don't have enough money to buy
and in case of loss of jobs, people may not be able to pay their mortgage.
Unemployment
Unemployment is the major factor related to the economic development of the country.
When the rate of unemployment increases, it will result into very few people or households will
be able to afford to buy a house. The fear of being unemployed discourages people to spend
more or enter into the property market as future is certain and no one can predict about the future
related to job and income.
Interest rates
Interest rate is the crucial factor that affects the cost of mortgage and interest payment.
When the interest rate is high, it will lead to increase in the high cost of mortgage payments
which will consequently lead to fall in the demand of the house for buying it. The high rate of
interest will lead to increase in the amount of rent. This factor will have a bigger impact in case
homeowners have large variable mortgages (Kamal, Hassan and Osmadi, 2016). In UK, the
homeowners prefers to take variable mortgages. So, if there is any variation or changes in the
base rate then it will affect the interest payment on mortgage. It is also a very important factor in
determining the affordability of housing. Mortgage payment takes on an average 25% or more of
disposable income of the people. A small change will also affect the buying needs of the people.

In the year 2008-09, interest rates were reduced to 0.5% but even though the demand
remained very low because of the impact of other factors such as recession and the increasing
rate of unemployment.
Consumer confidence
It is the most important factor in identifying whether consumers are ready to take risk in
respect to taking out the mortgage. It completely depends upon the confidence level of the
consumers (Salihu and Yusof, 2017). If people expects that the price will rise in the future, then
the demand increases with the hope of gaining wealth.
Mortgage availability
It is also an important point that assists in determining the demand for houses which is
based on the willingness or intention of banks to provide mortgages. In case, mortgage is
provided with higher multiples of income, then it will increase the demand for houses. It
completely depends upon the strength of the lending sector. Because of the 2008 recession, there
was a drastic increase in the lending cost and also there was a decrease in mortgage finance. It
resulted into withdrawal of many mortgage products.

Renting cost
If the renting cost increases, then there are chances that consumers will take chance to
buy a house through mortgage which becomes even more cheaper (Mulheirn, 2019). In UK, the

renting cost is very high and expensive that inspires the buyers to buy the property to let it and it
also encourages consumers to expand their spending or budget in order to get on the housing
ladder.
The above graph depicts 22% increase in renting cost with no effect of the economic
situations like financial crisis or crash in housing market. This has led to or has helped house
prices to rise after 2011.
Affordability
The increase in come refers to the situation in which people can afford to spend more on
housing. At the time of growing economy, the demand for houses increases and is considered to
be a luxury good. Thus rise in income tends greater rise in demand.
The above chart depicts that the prices and the demand for houses can increase at the
much higher rate in comparison to earnings and also suggests that there are other factors that can
influence the demand in short run.
Population

It is a very essential determinant as it is not only a number but a complete change in the
demographic. For instance, strength of consumers or people living individual has led to increase
in the demand of the houses. It also depends upon the average size of the household. There are
other determinants such as social and demographic factors that are the reason behind increase in
households. The demographic changes include increase in life expectancy rate, divorce rates etc.
The above graph forecasts the number of households rise in 2017 from 27.3 million to 31.6
million in 2039 which means an increase of 4.3 million.

This graph shows the projected population of England. It is forecasted to grow to over
and above 60 million in the year 2041 which means there is an increase of 6 million.
Supply
As per the law of supply, the shortage of supply will lead to the rise in price and the
excess supply will lead to the fall in prices (Gilbert, 2016). For example, in the year 1996-2006,
in the Irish property boom, there were approximately 700 thousand new houses were built. But
as the market distorted or sinked, the market was facing the situation of oversupply which lead to
fall in prices to 50% as supply was more than demand.

From above graph, in contrast to UK, the supply of houses was behind as compared to the
demand. During the period of scarcity, the prices of house in UK did not fall much in
comparison to Irish market and it recovered soon.
Task 2
Government and economic policies that can influence the demand of private rental housing
There are different policies that can be used to influence the demand of private rental
housing in UK. Some of them are stated below.
Interest rate policies
Interest rate policies has a greater impact on the prices of the houses because change in
the rate of interest will affect the cost of getting the mortgage and the payments as well. If the
rate of interest increases, it will lead to increase in the mortgage cost as a result, this will deter
prospective home buying people as taking house on rent will become even more cheaper in
comparison to buying a new house. This may also cause existing home buyers to sell (Ellington
and Milas, 2018). It will result into rise in the number of sellers and fall in the number of buyers
which will consequently lead to fall in house prices. It will consequently lead to increase in the
demand of private rental housing in UK. On the other side, 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 result into increase in supply of private rented house.
Taxation policies
There are few taxation policies implemented by UK government. Council tax is the tax
that is set by the each locality for the property used for dwelling irrespective of whether it is
owned or rented (Huang, 2018). In this, 50% is taxable to which property belong and remaining
50% depends upon the strength of people living in there. In case only, 1 person is living in the
house then the taxpayer can avail a single person discount which will be reduced to 25% from
50%. Also, if there are no tenants, owner of the property is liable to pay the tax. In UK after the
enactment of section 24 legislation in 2017, the tax relief received by landlords will be restricted
to the basic tax rate. The changes will be introduced 3 phases, that is, from April 2018, it will be
reduced to 50% from 75%, then in April 2019, it will be fall to 25% and at last in April 2020, it
will come to 0% and will be replaced by 20% tax credit which will have a short term impact. It is
applicable to landlords irrespective of UK or non-UK resident having residential rental property.
This has forced many to leave the market. Any slowdown in the supply will put more pressure on
rent (Section 24 - a guide for landlords. 2020). 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. As a result, now landlords are
required to pay more tax which will affect the supply and demand of the private rental housing in
UK.
Affordable housing policies
Over the past 20 years England has been developing a system in which many new
affordable housings will be created. It includes social and affordable rented and intermediate
housing. It includes both new build or sector property which is provided to specified households
whose wants and basic needs are not met (Affordable housing supply. 2019). Affordable housing
has improved the quality of life of the people by providing them better and adequate jobs and
security. It also improved population diversity, health and financial stability. All these important
aspects related to affordable housing has resulted in rise in demand of private rental housing in
UK.
Brexit

The Brexit deal will be having a greater influence on the UK housing market. UK has a
high proportion of people living on rent who are other than British. According to the survey
report of The English Housing of the year 2015-16, that approximately 25% of the rental
properties in UK are occupied by the people who are non-British or those who are not originally
from UK (Clark,E., 2020). If the because of Brexit, they all were collectively asked to leave then
it will have significant impact on the housing. This factor will has a huge impact on the demand
of housing and may lead to fall in demand which will consequently lead to fall in prices of the
private rental housing.
Public Housing policies
The policies UK has implemented Private Housing enforcement Policy 2016, it is
established with the purpose of enforcing housing standards in order to secure housing
improvement. It includes various actions to improve the housing conditions. There is another
policy implemented by UK known as The Housing and Planning Act, 2016, which has brought
some power to tackle the poor conditions and situations in respect to management of house
property by landlords and their agents in the private house rental sector. The civil penalty in this
Act, which decides the level of financial penalty in a particular case which will be determined by
the local housing authority (UK housing market outlook. 2019). This forces landlords to follow
the instructions and rules and regulation completely in order to avoid heavy penalties. There is an
enforcement policy in respect to Housing Health and Safety Hazard System which assists in
tackling the poor housing conditions. According to this system, landlord is required to ensure
that property is free from any hazards, also making sure that electrical appliances and gas is
safely installed. All these policies has helped tenants in gaining trust and feeling of security. As a
result, tenants are no more facing any issues which will lead to rise in demand of private rented
housing.
CONCLUSION
It can be summarized from the above that supply and demand plays an important role in
determining the price. The housing market in UK is facing various issues in respect to pricing.
Also, different determinants are evaluated which helps in identifying the prices of the houses in
UK. Apart from this, the different policies introduced were analysed that can affect the demand
of private rental pricing in UK.

REFERENCES
Books and journals
Ellington, M. and Milas, C., 2018. UK Policy Uncertainty, Monetary Policy Stance and
Exchange Rates in Light of Brexit. Available at SSRN 3244481.
Gilbert, A., 2016. Rental housing: The international experience. Habitat International. 54.
pp.173-181.
Huang, Y., 2018, August. Design of the Elements of Real Estate Tax on Possession from Real
Estate Tax in the UK. In 3rd International Conference on Judicial, Administrative and
Humanitarian Problems of State Structures and Economic Subjects (JAHP 2018).
Atlantis Press.
Kamal, E. M., Hassan, H. and Osmadi, A., 2016. Factors influencing the housing price:
developers’ perspective. International Journal of Social, Behavioral, Educational,
Economic, Business and Industrial Engineering. 10(5). pp.1603-1609.
Mulheirn, I., 2019. Tackling the UK housing crisis: is supply the answer. UK Collaborative
Centre for Housing Evidence.
Salihu, J. A. and Yusof, R. M., 2017. A critical review of hedonic price model on rental and
house prices in housing market. International Journal in Management & Social
Science. 5(4). pp.195-201.
Online
Hall, M., 2020. How Does Supply and Demand Affect the Housing Market? [Online]. Available
Through:<https://www.investopedia.com/ask/answers/040215/how-does-law-supply-
and-demand-affect-housing-market.asp>.
Pettinger, T., 2019. Factors that affect the housing market. [Online]. Available
Through:<https://www.economicshelp.org/blog/377/housing/factors-that-affect-the-
housing-market/>.
Section 24 - a guide for landlords. 2020. [Online]. Available
Through:<https://www.simplelandlordsinsurance.com/articles-and-news/guides/section-
24-a-guide-for-landlords/>.
UK housing market outlook. 2019. [Online]. Available
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2019.pdf>.
Affordable housing supply. 2019 [Online]. Available Through:<
https://www.gov.uk/government/collections/affordable-housing-supply >.
Clark,E., 2020. What will Brexit mean for house prices? [Online].Available Through:<
https://www.which.co.uk/news/2020/02/what-will-brexit-mean-for-house-prices/ >.
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