Economics for Business: Analysis of UK Rental Housing Price Factors

This report provides an economic analysis of the UK rental housing market, focusing on factors that influence rental prices. The introduction establishes the use of economic theories to examine supply and demand dynamics. Task 1 explores the determinants of rental prices, including regional demand, population growth, mortgage rates, taxation, and economic growth, with reference to the law of supply and demand. Task 2 examines governmental and economic policies, such as interest rates, taxation, and landlord rights, used to influence the demand for private rental housing in the UK. The report highlights how these policies can impact the supply, demand, and affordability of rental properties. The analysis provides insights into the complexities of the UK housing market and how economic factors and government interventions shape it. Desklib offers valuable resources for students, including past papers and solved assignments to aid in their studies.

Economics For Business

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Factors which influence the price of private rental housing in UK........................................1
TASK 2............................................................................................................................................7
Governmental or economic policies used to influence demand for private rental housing in
UK..........................................................................................................................................7
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
For examining the various factors that influences demand and supply of a particular
commodity in a specific area, economic theories can be used. This covers a number of issues
through which concepts like financial crises, fluctuations in production cost and more, easily be
analysed systematically. The present report covers key points which influences price of rental
housing in UK. To support this concept, law of supply and demand curves are utilised, which
help in exploring main determinants, including governmental policies used for stimulating price
of rental housing. This paper also looks at the level of house prices of UK from an economic
perspective, including fundamental processes which drive the market to take or provide homes
on rent on affordable prices.
TASK 1
Factors which influence the price of private rental housing in UK
Through economical perspectives, prices of houses in equilibrium are generally set by
balance of supply and demand. However, if, supply persistently fails for responding towards
higher prices of homes, or if prices drive by factors which are different from fundamental needs
for housing, then under such conditions, prices of houses are potentially hike and unaffordable
for buyers. This would upward pressure on cost and wages of doing business, as well as increase
risks on stability of macroeconomics. Therefore, people under such conditions, instead of buy
house seek to take on rents, in order to meet their basic needs of shelter. Affordability of housing
in economic terms, defines as relationship between ability of buyers to pay and market-
determined costs of housing. Along with this, such concept not usually relate with ‘affordable
homes’, i.e. social rented and intermediate housing, which are provided to some eligible
households, needs of whose are not met via certain market. Furthermore, even at condition of
equilibrium, prices of specified housed will be beyond the budget, leaving some who are not able
to pay where they are unable to access ownership of home. In social terms, lack of affordability,
also has perverse effects on living cost by pushing up the rents. Furthermore, unaffordability to
buy house also leads to increase demand of rental housing, where, as per law of supply and
demand, it increases price of same also. In this regard, UK which is one of the overcrowded
nation of European, housing challenge is considered as enormous and thereby, needs to take
adequate attention, for meeting demand of people to meet their basic necessity of shelter. House
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prices of UK cities, including London, Newport and more, are relatively higher than others, due
to increase in demand (Most in demand areas in the UK to rent a property, 2020). Along with
this, price of rental housing also rising rapidly and faster rate than other areas. It is also,
particularly true for some desirable central locations of London boroughs where, demand for
private rental housing is continuously raising.
(Source: Index of Private Housing Rental Prices, UK: October 2018, 2020)
Considering the index of private housing of UK, it has been evaluated that evaluated that
price of rental private housing is increasing continuously, where main factor behind this is can be
considered the increasing demand of tenants. It has been interpreted from this figure that, private
rental prices which are paid by tenants to householders or landlords in this nation, has been risen
by more than 0.9% in 2018 as compared with last year. In London, private rental prices have
grown by 0.9%, while in Wales it is 0.7% and in Scotland by 0.6% (Index of Private Housing
Rental Prices, UK: October 2018, 2020). So, it ultimately leads to arise problems for tenants
where they are paying higher rentals to meet their needs. In this regard, factors which increase
rental housing price in UK, by economic perspective are given as below –
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Regional / Local demand factors: This factor includes the preferences of tenants for taking
house on rents, where they give priority towards facility and accommodations; nearby locations
from their offices; safety and security etc. as per their purchasing ability. So, it raises demand of
rental housing within metropolitan areas, which tends to increase price of same as well.
Decrease in demand -
Increase in demand
Supply: Demand of rental housing on tenants can only be met if there is an efficient of by
supply in a particular marketplace. Therefore, in case of shortage of supply of housing as per
demand of tenants will hike the price of houses also. Other than this, excessive supply of rental
housing, may cause decrease in prices of house. When real estate market collapsed, then this area
may be left with excess supply of housing and prices of same will fall in such case also.
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Through supply and demand figures, it has been interpreted that increase in demand with
decrease in quantity of supply of rental housing, leads to raise prices of same. While decrease in
demand and excessive supply of rented house results in decreasing prices. Therefore, local
demand and preferences of people, with availability of same in a particular area, is considered as
main determinants of measuring rental housing price.
Population: This refers to another main factor which highly influences the demand and
supply of housing, where increasing population decreases the availability of households. In this
regard, it has predicted that with increase in size of population, demand for rental housing in
rapidly increasing, that ultimately leads to raise pricing of same as well. As given figure, it has
estimated that due to migration of population, expectancy of birth rate and good quality of living
standards, all tends to increase growth rate of population, which arise problems in meeting their
necessity of homes. In this regard, it increases demand of tenants for rental housing with
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insufficient supply, therefore, population rate refers to be main factor of increasing price of rental
housing.
Mortgage rates - It is one of the main factor that highly increases price of housing,
because due to paying the high mortgage rates, households demand more price to tenants. As per
below figure, mortgage rate is increasing continuously in UK, therefore, it depicts that it will
increase price of housing and ultimately for rented house also.
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Taxation and interest rates – This factor also plays the main role in economics, which
helps in determining rental housing price, where fluctuations in interest and taxation rates will
alter rate of interest and taxation also. Under this case, it will lead to increase housing prices also,
because people have to more for purchasing and maintaining the properties. Therefore, to cover
this expense and gain high return on investment, householders rise price rent. As per statistical
figure, inflation rate in UK is near about 1.7% annually, which is expected to raise by 2.2% in
2020. Thus, it may increase price of rental housing as per economical model in this year (UK
Inflation Rate, 2019).
Economic growth: This factor also plays main role in shifting demand and supply curve of
housing and other commodities. It shows that demand for buying or selling capabilities of public
in real estate sector. In case of economic stability, income of people and growth of economy
increases consistently, which automatically lead to raise demand of housing also. Under such
case, people also become able to spend money on housing and its maintenance. But it will raise
price of rental housing also, where tenants who work at lower wages seems to be unable to afford
the same. As per the below figure, it has been interpreted that with increasing growth of
economy, price of housing also increases rapidly, where people who are not in condition to buy
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houses moves towards rented property. This may increase demand of rental housing and raise its
price as well.
From the above analysis, it has been evaluated that there are various factors which
impacts the private rental housing in UK. It has been also analysed that the factors such as
interest rates and taxation are the most influential elements due to price and demand of private
rental housing is impacted.
TASK 2
Governmental or economic policies used to influence demand for private rental housing in UK
Governmental or economic policies are the rules and regulations which governmental
authorities levy so that they can control the demand and prices of a commodity. In this case,
government of United Kingdom can impose various policies by which demand of private rental
housing of UK can be impacted. These policies are divided into two categories and they are
demand side and supply side. All these policies are identified and analysed below:
Interest rate – It is considered as the most important government policy which can control
and influence the demand of private rental housing in United Kingdom. Interest rate is the rate at
which an individual has to pay the interest if that individual has taken a loan. The power of
setting interest rates is in the hands of UK government. Any financial bank or other institution
has to provide loan at a rate which has been given by government. If government raises the
interest rate on the loans procured against the purchase of housing property, then people of UK
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will tend to prefer rental properties and the demand of private rental housing will automatically
increase. Interest rates can even be decreased by government to lower down or to control the
demand of rental properties in UK region.
Taxation – It is a government policy against which every individual of United Kingdom
including both natural and artificial has to pay tax against their incomes, capital gains and
properties. Landlords are the individuals who have the rights over the ownership of a rental
property. These landlords have to pay taxation against their rental property. In order to influence
the demand of private rental housing in UK, government can increase the taxation rate for
Landlords due to which these individuals has to pay larger value of taxation and this value will
be gained by them from their tenants by increasing the price of their rent. This increase in price
rent will result in decreasing demand of private rental housing in UK.
Landlord rights – As mentioned above, landlords are the owners of private rental
housing. These individuals are given few rights from government which they can exercise
against their tenants in order to protect their properties. If government restricts the landlord rights
and state that the landlord hold no right to vacant their property in less than 30 days in presence
of any situations then landlord will less prefer to rent out their housing property and the supply
of private rental housing UK will reduce. This low supply will result in high demand of these
properties. In this way, the policies of landlord rights have an indirect impact upon the demand
of private rental housing in UK.
Other government policies – Apart from above mentioned policies, there are few other
policies of demand side as well which impacts the demand of private rental housing in UK
region. These policies include the environment policies. If in the case, government of UK
decided to reduce the carbon footprint in their region and make regulations due to pollution in
the environment of UK reduces, and then the preference of people of staying in UK will increase.
This enhanced preference will result in increased demand of private rental properties in UK.
There are various other government policies as well. For example, if UK included in their
economic policy that people earning in UK has to pay less income tax then the preference of
staying in UK will increase. This increasing preference will also result in increasing in demand
of private rental housing as migrates will have to find a place in UK to stay.
Public housing – This is a government policy which states that UK’s government has the
right and responsibility to provide clean and safe houses to people of UK who are unable to
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afford a housing property. This policy is created from the purpose of overall development of the
economy. If government decides to restrict this policy and reduce the number of public houses in
UK, then those people will seek the place to live from private rental housing and it will
automatically increase the demand of such properties.
Social housing – The concept of social housing is similar to public housing. The
difference between these two concepts is that the public housing only provides a house to needy
people for a limited period of time and the ownership held in the hands of government only. On
the other hand, social housing is the governmental policy under which government provides
housing properties to needy people by using the method of rationing. In this concept, the housing
properties are provided at lower costs and the transfer of ownership is included which means
people can become the owner of their houses. This policy can be used by government to
influence the demand of private rental housing in United Kingdom. Government can increase the
number of houses which they can provide to people under the policy of social housing. By this,
the need of private rental properties will reduce which will decrease the demand of such
properties. The concept of social housing is further analysed using a graph which is presented
below:
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