Economics for Business: Analysis of UK Private Rental Housing Market

This report provides an economic analysis of the UK private rental housing market, examining factors that determine costs and exploring policies to stimulate demand. The report investigates both demand-side and supply-side influences, including the impact of Brexit, population changes, and government policies on the market. It analyzes how planning reforms, building costs, and economic uncertainties affect rental prices. Furthermore, the report discusses governmental and economic policies such as affordable housing initiatives and regional development strategies. The analysis utilizes economic models, including shifts in supply and demand curves, to illustrate the dynamics of the UK rental market. The report aims to offer insights into the complex interplay of economic forces and government interventions within the private rental housing sector.

Running head: ECONOMICS FOR BUSINESS
Economics for Business
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EXECUTIVE SUMMARY
This paper intends to investigate the private rental housing in the UK with the help of demand
and supply analysis. This paper examines the factors that determine the cost of the private rental
housing in the UK. Both the supply-side and demand-side factors of the private rental housing
are analysed in this paper. In addition, this paper also identifies and suggests economic or
governmental policies to stimulate the demand for private rental housing in the UK. One of the
major sector of the UK economy influenced due to various internal and external economic
conditions. This paper taken into consideration all these factors to understand the overall growth
of the private rental housing market of the UK.

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Table of Contents
Introduction......................................................................................................................................3
Task 1...............................................................................................................................................3
The factors that determine the cost of private rental housing in the UK.........................................3
Task 2.............................................................................................................................................10
The economic or governmental policies to stimulate the demand for private rental housing in the
UK..................................................................................................................................................10
Conclusion.....................................................................................................................................13
References......................................................................................................................................15

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Introduction
One of the advanced economies of the European mainland, the United Kingdom (UK)
formed with two parts such as United Kingdom of Northern Ireland and United Kingdom of
Great Britain (Gov.uk 2020). The largest and capital city of the county is London. It is the
financial center and global city of the UK. Moreover, other important cities of the country
include Glasgow, Liverpool, Birmingham, Manchester and Leeds. As of 2019, in terms of
purposing power parity (PPP) the country stood at 9th largest economy of the world. While, as of
2019, in terms of nominal gross domestic product (GDP), it stood at 6th largest economy of the
world.
It is recognized as first industrialized country of the world. One of the vital sector of the
UK economy is housing, which contributes largely in the economic development of the country
(Baptista et al. 2016). In the UK, the largest non-financial assets class is represented by the
housing. Out of the total housing in the UK, the percentage of privately rented are 12%. The cost
of the housing remained higher in terms of income and major high-priced areas are London
(Investopedia.com 2020). The lower income areas of the UK also created burden for the
population. Among the EU countries, the housing cost of the UK is greater than the average.
There are a wide range of factors that impacts the price of the private rental housing in the UK.
In addition, the demand for the private rental housing in the UK also influenced by economic or
government policies.

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Task 1
The factors that determine the cost of private rental housing in the UK
The private rental housing is a major segment of the housing market of the UK. The
country registered a slow growth between 2016 and 2018 (Soederberg 2018). As a result, there
was a slow growth in the costs of private rental housing in the UK since the beginning of 2016 as
well. There was a downward growth trend in London in the same period, which impacted the
private rental pricing. As the growth rate started strengthening since the end of 2018 in London,
the growth rate of the rental pricing also boosted. Since November 2019, the private rental
housing prices in the UK was kept unchanged (Ons.gov.uk 2020). Later, in December 2019, it
increased by 1.5% in the UK and it scaled up by 1.2% in the London. The varied region of the
UK witnessed different prices of the private rental housing. Hence, the role of the factors related
to demand and supply helps to deduce the price of the private rental housing in different region
of the UK. The demand side factors which affected the price determination include the change in
population due to the free flow of the migrant labor and Brexit. Likewise, the supply side factors
which affected the price determination include planning reform and cost of building houses.

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Figure 1: Supply shifts leftward
Source: (Mankiw 2020)
Figure 1 represents the leftward shift of the supply in the UK housing market. Moreover,
the constraints in the planning reform of the UK government led to the shortages in supply of
private housing. As a result, it impacted the price of the private rental housing in the UK. The
policies of the government made it difficult to build enough houses to fill the gap between the
supply and demand (Gurran and Bramley 2017). The changes in supply from S1 to S2, shifts the
price and quantity to P2 and Q2 respectively. Hence, there prevails an increase in price due to
shortages of housing.

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Figure 2: Supply shifts rightward
Source: (Mankiw 2020)
Figure 2 illustrates the rightward shifts in the supply in private rental housing sector of
the UK. There may exists excess supply of the private rental housing in the UK through lowering
the cost of building house. It is one of the key factor, which may influence private rental house
prices. As the government may adopt policies to scale down the cost of building houses, it may
in turn enhance the affordability. There will be an excess supply of the private rental housing in
the UK (Hoolachan et al. 2017). The supply curve shifts from S to S1 in right direction and
results in changes of price and quantity of private rental housing. The price and quantity of rental
housing decreases to P2 and Q2 respectively.

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Figure 3: Demand shifts leftward
Source: (Mankiw 2020)
Figure 3 shows the leftward shift in demand for the private rental housing in the UK.
Uncertainty of the Brexit deal led to rise in price of the private rental housing in the UK, due to
lower demand of the private rental housing (Hill 2019). There is a negative effect of the Brexit
on the housing market because of uncertainty. The demand for the private rental housing lowers
from D1 to D2. Moreover, lower demand leads to the higher price of the private rental housing.
The new price and quantity plummets to P2 and Q2 respectively. However, there is a possibility
of higher demand in private rental housing sector of the UK in future after finalization of the
Brexit deal (Morrison 2016). It would help to understand the proper implication of the Brexit.

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Figure 4: Demand shifts rightward
Source: (Mankiw 2020)
Figure 4 illustrates the rightward shift in demand for the private rental housing sector of
the UK. The free flow of the migrant laborers brings changes in the population growth, which
stimulates the demand for the private rental housing dramatically. As the country need to retain
more migrant laborers, the demand for the rental accommodation that is privately owned also
scales up. It brings sharp changes in demand and the demand curve moves from D1 to D2 in
rightward direction (Eriksen and Ross 2015). As the demand increases, it leads to the rise in
price of the private rental housing in the UK. It moves both price and quantity upward to reach
new equilibrium.

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Figure 5: Inelastic demand
Source: (Mankiw 2020)
Figure 5 represents inelastic demand in the private rental housing market of the UK.
Here, the changes in quantity demanded brings greater changes in the price of the private rental
housing, where the supply of the private rental housing remains same (Wijburg et al. 2018). The
quantity demanded increases from Q1 to Q2 in the housing market of the UK. Likewise, it rises
the price of the private rental housing from P1 to P2. Therefore, the inelastic demand leads to
higher prices of the rental housing.

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Figure 6: Inelastic supply
Source: (Mankiw 2020)
Figure 6 shows the inelastic supply of the private rental housing in the UK. Here, a slight
changes in the quantity supplied leads to the higher rise in price of the private rental housing in
the UK (Ronald and Kadi 2018). The market of the private rental housing shows greater changes
in prices due to the changes in quantity supplied. The quantity supplied shifts from S1 to S2,
keeping the quantity demanded same. As a result, the quantity and prices scales up to Q2 and P2
respectively. The influence of the demand-side and supply-side factors helps to determine the
price of the housing sector of the UK, especially private rental housing. As the impacts of these
factors are higher, the responsiveness of changes in price is also higher.

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Task 2
The economic or governmental policies to stimulate the demand for private rental housing
in the UK
It is essential to control the demand for private rental housing of the UK. Thus, the
government of the UK may adopt economic policies to influence the demand of the sector. The
economic or governmental policies related to Brexit, affordable housing policies, government
policies used to develop the regions in the UK, price caps, subsidies and government
intervention, social housing. These factors have vital impact on the demand of the private rental
housing in the UK (Ft.com 2019). Government should implement those policies efficiently in
order to achieve higher demand in the housing sector.
Impact of the Brexit on demand
The number of renters in the UK scaled up gradually over the past several years. Out of
total population one fifth lived on the privately rented houses in the UK. The effect of the Brexit
on the demand of the private rental housing depends on the region to stay and the reaction of the
landlord. There may be a financial impact of the Brexit on the private rental housing due to the
change in demand (Montgomerie and Büdenbender 2015). There is a high possibility that the
living cost of the country may get affected because of the Brexit. The economic turmoil and
uncertainty caused by the Brexit left the landlords unsure about the present market condition of
the private rental housing. The market of rental housing already faced weaker demand in the UK.
Hence, further deterioration is possible due to the Brexit uncertainty, although the impact on the
demand will differ depending on the region of the UK. However, there could be positive impacts
of the Brexit on the private rental sector of the UK due to less inclination of the people to sell or