Economics for Business: Factors Affecting Housing Prices in the UK

This report provides an economic analysis of the UK private rental housing market, focusing on the interplay of supply and demand, and the factors that determine prices. It examines the application of microeconomic principles to understand the dynamics of the rental market, including the impact of affordability, economic growth, population, interest rates, and the cost of renting. The report further analyzes the role of governmental and economic policies, such as fiscal and monetary policies, and privatization, in influencing the demand for private rental housing. It provides insights into how these policies can be used to stabilize the market and affect housing prices. The report concludes by summarizing key factors affecting house prices, including supply and interest rates. The analysis includes relevant graphs and data to support the discussion.

Economics for
Business
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Table of Contents
EXECUTIVE SUMMARY.............................................................................................................1
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Supply and demand analysis to identify factors that help to determine the price of..............1
private rental houses...............................................................................................................1
TASK 2............................................................................................................................................7
Main governmental or economic policies used to influence the demand for private rental
housing...................................................................................................................................7
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11
Supply Curve. 2020. [Online] Available Through:
<https://www.investopedia.com/terms/s/supply-curve.asp>.........................................................11
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EXECUTIVE SUMMARY
As below report summarize the important of business economic and defines that Business
economics term is defining to long term planning and decisions that studied for the capital
budgeting as well as further management practices. Some of the entity have their separate role
such practices as business analyst, stock broker, investment analyst and others. Business always
desire to reduce cost as well as to maximize by implementing several strategies. Some other
areas that involves in business economy is related to supply of product and services on the basis
of specific demand of customer. All these practices assist to provide opportunities to a business
for attaining desired growth effectively.
INTRODUCTION
The systematic application of different models and concepts of mirco economic that
support company to meet any difference that arises at the time of business operation is known as
economic of business. Supply market curve represents the quantity of goods which suppliers are
willing for selling on a given price. In the respective demand curve the quantity by the buyers
which they are willing to buy on a certain price is elaborated.
In this report, the variables which impact the demand and supply of private rental houses
prices in UK are discussed. In addition, primary government reforms that are implemented to
impact the demand for rental houses are elaborated with appropriate facts and figures.
TASK 1
Supply and demand analysis to identify factors that help to determine the price of
private rental houses.
Demand law: This is related to the belief or attitude of consumer in context of services
and good that they willing to buy at a specific time frame. The law define the price and actual
goods weights are always equitable and have an inverse association with each other. However,
these variable have a fixed relationship in short frame but in long period these variable impact
demand as well as supply. In related to private housing of UK the price gets to raise in case if
demand of land gets reduces and vice versa. The below diagram define the correct
acknowledgement related to demand of rental houses in UK.
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Illustration 1: Demand of private housing. 2020
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From the above graph it is easy to determine that in case if price of private houses
decrease such as form P to P1 than demand for houses increase form Q to Q1. As law states that
there is reverse connection of price and demand of product so the curve move in right direction.
Therefore, companies dealing in real estate business get the advantage of demand curve and
make effective plans in order to expand the demand of rental houses in UK in short run.
Furthermore, it is observed in short time period only price and measure of good affect the
demand, while in lengthy time period there are many other variable which impact demand.
Supply law: The economic theory is relevant to the assumption of production which
states that the supply of good mainly modifies as the changes in the price of goods and services.
Thus, the law of supply define that quantity supplied and price have positive relationship so
whenever the price are going to rise the supply of houses in UK will directly increase or vice
versa. In UK, a builder grows or reduce the construction according to the movement in housing
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prices. The graph below give more clear picture about the concept of supply and price.
Illustration 2: Supply of private housing. 2020.
The graph above display the positive relation among supplied quantity and price of
houses in UK which support to fulfil the demand of customer. This relationship remain constant
in the short span because all the other variables are fixed. However, in long span this connection
might get change due to modification in other variables. In case, if prices tends to increase form
£ 200,000 to £ 250,000 then at the same time supply of houses for rental purpose also gets
increased. Thus, the movement for Q to Q1 shows a right move because of price rise in the
subsequent period. This is because all suppliers want to take advantage of higher price of house
which helps them to increase their overall profitability. So the respective analysis is meaningful
for construction firm in order to make better policies which will be supportive in increasing the
supply to maximise overall profitability.
Other factors determining the price of houses in UK.
There have been numbers of factors which has impact on the demand and supply of
private rental houses in UK. Such as affordability, growth of economy, total household, presence
of mortgages etc. this support in ascertaining the price of houses in UK with the following
manner (Factors affecting supply and demand of housing, 2020).
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Affordability: Rising per income per capita indicates people can afford to buy a house at
a particular price point. Under such circumstances, the demand for buying family home also
increases whenever the economic situation is big. Enhanced revenue is therefore considered as
one of the primary factors that affect housing prices. Housing prices can be defined with this
help, i.e. if demand rises and prices of same would also increase. In relation to United kingdom,
with the help of graph below it is evaluated that house demand are increasing at a quicker rate as
compared to per capital income of customer. Thus it means that affordability of customers have
also impact on the demand of houses or any commodity.
Confidence: Housing demand often affects the confidence of consumers, especially
regarding the long term of the industry and the property market. If economists predict that
property prices will continue to grow in the future, in order to improve capital, it will increase
business to make expenditure in house buying (Salvatore, 2015). Thus, earning, trust or
forecasting of the long term, requirement for buildings and their cost are influenced quicker than
others factors.
Population: This is also a significant factor that affects demand and consequently
housing prices, in which it relies not just on population numbers but on the average weight of
residences. Hence, rising life-expectancy, birthrate and much more, causing changing
demographics and increasing population growth. This estimated that the population in the United
Kingdom will increase more in the next decades. This is the element that affects the size of the
population and thus affects the UK's requirement for private housing. Population growth will rise
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investment in new buildings and likewise, population declines can immediately reduce
consumption in the housing industry. The total population in London is about 89 Lakh till year
2018 and the total population living in UK is 6.64 Crores.
Interest Rates: This is consider to be valuable factors which support in recognising the
price of houses or any good or services. It simply means that any change in the interest rates
might affect the repayment of mortgage which are taken by customer for housing purpose. It is
obvious that interest rate is helpful in factors which is beneficial to ascertain the affordability and
actual price of houses in the existing market. In present year, the inflation rate is 2.2% which is
going to slightly rise in the remaining year according to the economic circumstances and model.
Thus, it might rise the demand of houses because of increased price in the future time period (UK
Inflation Rate, 2020).
Cost of renting: The variable also impact the demand of private rental houses as any rise
within the cost of renting will definitely enhance the demand for new homes. When rental cost
increases people have to pay more rent which increases their overall expenditure, thus they
intend to purchase a new house instead of paying huge rents. On the other side if rent price are
lower than the demand for rental house will increase as people think to stay in rental houses
instead of buying new homes. Therefore companies dealing in construction industry must make
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better policies in order to increase demand by providing houses on rent at lower cost and
maintaining suitable profit.
Economic growth: It is known to be the key factor which demonstrates the desire for
buying or having private residential investment relies on wages. Through economic development
production and person's wages would automatically increase. This would enable customer to
invest money on buying a property for these personal use of lend to other needed person
(Average house price of UK, 2020). The changes in the house price of UK because of economic
development and expansion might be determined with the support of graph which is mentioned
below:
The graph above shows the average figures of UK houses prices in different year and it
have been identifies that from last few years the prices are growing higher and higher. It is clear
that increase price of houses have a major impact upon the private rental market because there
are limited buyer to purchase the houses. Individual thinks to rent a house rather than purchasing
at higher cost as they can make other investment too in future for better results.
Main factors affecting house prices
Supply: UK home values have remained relatively strong thanks to a lack of production
(despite contraction and liquidity crunch) Ireland and Spain has witnessed far greater declining
house prices since they have a massive production surplus.
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Interest rate: The UK housing sector is prone to interest rate swings. Throughout the early
1990s, increasing interest rates render mortgages inaccessible and sparked a significant decline
in home prices.
TASK 2
Main governmental or economic policies used to influence the demand for private rental
housing.
All those policies and reforms which have primary focus to increase the average demand
and supply of a product which is beneficial in increasing the overall economy. There are some
specific policies introduces by government to increase the demand such as fiscal, monetary that
means cutting of tax rates and interest rate respectively. These strategies are effective for
companies dealing in construction sector at the time of recession. Similarly government
interventions are privatisation, free trade agreements, developing infrastructure etc. are effective
in improving the supply of goods and increase the overall profitability of economy. These
reforms are discussed underneath:
Fiscal Policy: Government may reduce tax rates and boost further expenditure to
enhance housing demand. Smaller tax outcomes throughout this respect to improve the available
income and promote buyers to spend money on accommodation. Likewise, government
expenditure can help create further job opportunities and reducing unemployment, which will
provide a boost to the economy. So this could be a problem with fiscal policy, as there is also an
increase in government debt under this scenario. Here, the government needs to borrow from the
private industry to fulfil these extra expenses. In the event of growing economic, increased
government debt can crowd out the private industry and result in an increase in public sector
volume as well. Costs of private housing may rise in this scenario.
Monetary policy: This is referred to as an important government strategy that aims to
raise housing demand in the UK by affecting the economy's financial activity (Monetary policy,
2020). In the same perspective central bank use to reduce the rate of interest by a significant
percentage that diminishes the borrowing cost and general public can make appropriate
investments. Moreover with lower rate of interest the mortgage loans are also available at lower
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rate which will definitely interest the disposable earning of customer and they can save a specific
amount for future use.
Privatisation: This policy of government is related with making a sale of self-owned
assets in the private industry. Thus in case when companies are operated privately then the main
focus to earn profit which have a impact on the overall efficiency of different operation
performed. It is also necessary for the private firm to be accountable to their respective
shareholders and provide them most satisfactory return on investment. Therefore purchase of
self-owned assets would help in attaining the main objective of business. Sluggish housing
market pushes Right move agents out of business it would offer an important boost to demand
for rental housing. In addition, private businesses in the building sector will exploit venture
capital to enhance organizations' profitability in selling land at cheaper rates at increased level of
service (Privatisation, 2020.).
Government engagement: UK government will try to fight social disparities through taxes,
discounts and redistribution, which tends to promote overall economic equality. Maximizing
social welfare, such as creating more jobs, reforming workplace unions, etc., helps to improve
conditions for workers and raise people's income rates. For instance, legislation on the price cap,
that is the rental control mechanism, could be used to grow the economy for rental housing.
Higher rent thus helps to purchase a property more effort, which also increases demand.
Price policy: The upward and downward situation of the market is fast variability of
house prices. It therefore relates to the primary cause of private investment uncertainty. To
accomplish the goal of boosting new housing demand, government measures to stabilize a price
which is very much crucial. Throughout this respect, a price promotion policy involving
commodity transactions specifically throughout the private market, meaning that government can
both acquire and sell certain stored properties to modify the supply with demand. If housing
prices decrease, people are avoiding buying property under these circumstances by anticipating
losses in future. Government must intervene to guarantee that additional rates of property do not
decrease, and also that people could benefit from new housing expenditure. It would help to
boost private housing requirement and also increase economic growth.
Some other policies made by government are discussed underneath:
Planning permissions/ green belt land: In the United Kingdom, there are several strict
efficient scheduling restrictions in the Green Belt Area that help to improve components not
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harmful or destructive. Throughout the Green Belt region there have also been certain types of
real estate development authorized under international standards. This primarily includes:
 Farming and agriculture land.
 Monuments and facilities which is supportive for sport activity.
 The modification and expansion of present cultivation monuments in the location.
 It is also focused in limiting the infilling of land in various villages areas.
So the Councillors have noted that throughout the proposed law advocates, municipalities
and elsewhere have reversed and called for a total ban on the production of the green curtains.
Although they do not agree to any consensus on the rules of that same green belt, developers
tried to develop favourably.
Brexit: The latest data shows rents across Britain actually fell for the first time in a
decade last year. The biggest falls were in Yorkshire and Humber, where rents dropped by £21
(3.63 per cent), and London, where rents were down by £30 per month from 2018.
Right to buy schemes/ affordable home ownership schemes:
Equity Loan Strategy: for purchasers and current home owners those want to purchase a
home. The actual price for purchase shall not be greater than £ 600,000. Within this system,
client may borrow 20 per cent for the very first five years of the price of the property, free of
interest, provided that they have a minimum deposit of 5 per cent. Moreover customer can buy
up to 40% of the price of the property when living in London. The aid for the purchase of equity
loans is extended to 2023. Nevertheless, this expansion is limited to consumers who own newly
constructed properties for the first time. The ability to buy is for people who hire a property in
Britain, Scotland or Britain through a local authority. This causes eligible landlords to lose their
homes. The amount of the decrease depends where customer live and on the business property
you would like to buy. Tenants who resided in a council flat until moving to a local council.
CONCLUSION
In the end of report, it has been founded that demand and supply assessment is useful for
companies operating in housing sector to set the price as per the market situations. There have
number of elements which have a direct impact upon the demand and supply of private rental
houses like change in population, renting cost, interest rate etc. All these factors basically deals
with the process of manufacturing, allocation, value addition as well as total usage of existing
goods and services. Proper analysis of these factors support in making effective strategies which
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are must be implemented in the desired manner to increase the overall profitability of business.
In respect to enhance the demand several policies are formulated by government like monetary,
fiscal, price policy, affordable home ownership scheme and planning permission.
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REFERENCES
Books and Journals:
Average UK price of UK. 2020. [Online] Available Through:
<https://www.bbc.com/news/business-48689404>.
UK Inflation Rate. 2020. [Online] Available Through:<https://tradingeconomics.com/united-
kingdom/inflation-cpi>.
Factors affecting supply and demand of housing. 2020. [Online] Available Through:
<https://www.economicshelp.org/blog/15390/housing/factors-affecting-supply-and-
demand-of-housing/>.
Supply Curve. 2020. [Online] Available Through:
<https://www.investopedia.com/terms/s/supply-curve.asp>.
Main factors affecting house prices. 2020. [Online] Available Through:
< https://econ.economicshelp.org/2013/06/uk-housing-market.html>
Monetary policy. 2020. [Online] Available Through:
<https://www.acdcecon.com/>.
Privatisation. 2020. [Online] Available Through:
< https://www.ft.com/content/e264e85a-af6c-11e9-8030-530adfa879c2 >
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