Economics for Business: Analysis of UK Housing Market - SBLC4004

This essay provides an analysis of the factors affecting housing prices in the United Kingdom, primarily focusing on demand and supply dynamics. It examines short-run influences such as affordability, consumer confidence, population demographics, real wages, interest rates, renting costs, and mortgage availability. On the supply side, the essay discusses the impact of production costs and taxation. The long-run perspective is also considered, along with an evaluation of government schemes like Help to Buy and Shared Ownership aimed at assisting first-time buyers. The essay identifies key drivers of price fluctuations in the UK housing market, offering a comprehensive overview of the economic forces at play.

Running head: FACTORS AFFECTING HOUSING PRICES IN UK
Factors Affecting Housing Prices in UK
Name of the Student:
Name of the University:
Author Note:

1FACTORS AFFECTING HOUSING PRICES IN UK
Executive summary:
Demand and supply being the most important components of any economic analysis have been
used in this assignment to analyze the housing market of United Kingdom. The factors affecting
both demand and supply have been discussed and the short run and long run scenarios have
discussed subsequently. The impact of new governmental schemes like Help to Buy and Shared
Ownership which are aimed at providing help to first time buyers have also been discussed and
its impacts have been analyzed. Only the factors and their effects are discussed but the quantities
or magnitudes of the same have not been analyzed.

2FACTORS AFFECTING HOUSING PRICES IN UK
Table of Contents
Introduction:....................................................................................................................................2
Demand Side Factors (Short Run):..................................................................................................2
Supply Side Factors (Short Run)...................................................................................................10
The Long Run Curve:....................................................................................................................15
Effects of Government Schemes:..................................................................................................15
Conclusion:....................................................................................................................................17
References:....................................................................................................................................18

3FACTORS AFFECTING HOUSING PRICES IN UK
Introduction:
Demand and supply form the very basis of economic analysis in case of any market or
sector. It draws the relationship between factors that lead to the pricing of a product both in the
short run and the long run. The real estate and housing market in the United Kingdom is one of
those sectors which are most talked about and where demand and supply keep changing
drastically on an annual basis (Wilcox and Perry 2014). Studies suggest that this sector has been
gravely affected due to Brexit and even without that scenario prices keep fluctuating due to the
changing needs and choices of people. Research suggests that the house owning demographics in
UK has also altered over the years. It has shifted from young to the old. It us easier for the old
crowd of UK to own houses faster than the younger population who have to wait for years before
they get hold of good property (Booth and Choudhary 2013). To top it all, the construction rates
of property in UK have also gone down which causes increased shortage and higher prices. It has
also been observed that despite this huge demand for houses in the UK, most of the population is
still resorting to rent. There are various other reasons why this is happening. If a keen look is
taken at the House Price Index (HPI) for UK from 2006 to 2016, it can be observed that every
year there has been a increased growth in the prices apart from one or two years. In this essay,
the various aspects that drive the change of demand and supply are discussed and dealt with. In
addition, to the same both the short run and long run scenario are mentioned. The factors
affecting demand and supply of houses in UK are discussed in detail in the following section.

4FACTORS AFFECTING HOUSING PRICES IN UK
Demand Side Factors (Short Run):
Affordability and Consumer Confidence - With increase in the amount of gross
disposable income that the households own, the demand for houses have inevitably increased. It
should also be noted here that as house is considered to a luxurious good, with some increase in
income, the demand increases even more. This causes the price to rise even higher. This
increased effect on prices is primarily felt in the short run.
With the rising prices, consumer confidence also varies as their income also increases.
When the economy is in a situation where it is facing a boom, the demand for houses rises faster
than the increase in income of the population residing in UK (Mulliner, Smallbone and Maliene
2013). The following diagram shows that with increase in affordability as demand rises, the
demand curve shifts from DD to D1D1 while supply remaining constant, causing the equilibrium
price (from P0 to P1) as well as the quantity to rise (from Q0 to Q1).

5FACTORS AFFECTING HOUSING PRICES IN UK
q
p
S
S
D 1
D 1
D
D
P0
P1
Q0 Q1
Figure 1
Source: Created by author
Population and Demographical Factors – The other important factor that influences the
demand for houses in UK is the growing population over the years. It is specifically important to
note here that it is not only the total rise in population but also the rise in single people who are
buying houses at an increased rate. The average household size also keeps increasing which
causes greater number of houses to be bought (Barros, Gil-Alana and Payne 2012). The two
factors that intrigue this change are increased rate of divorce and increase in the life expectancy
of the older population. The increased population seeking to find better homes and buying
houses in the UK market causes demand to increase and the price rises again as shown in the
following diagram, from P0 to P1. Demographical factors also play their own role in adding up

6FACTORS AFFECTING HOUSING PRICES IN UK
q
p
S
S
D 1
D 1
D
D
P0
P1
Q0 Q1
to the already existing demand for houses in UK. It has been noted that since 2006, the age group
that is looking out to buy new houses and is being successful in doing so are the people who are
of the age group 65-74 years (Wilcox and Perry 2014). This is so because for them buying is
easy because of the money saved over the years which for the youngsters is not possible and
hence they have to wait longer to save enough (Clapham et al. 2014). This wait is causing a
continued existence of demand for houses.
Figure 2
Source: Created by author

7FACTORS AFFECTING HOUSING PRICES IN UK
q
p
S
S
D 1
D 1
D
D
P0
P1
Q0 Q1
Real Wages and Incomes – It is also reported that for the years 2006 to 2016, the
demand for houses and real estate has increased due to the increase in the amount of money
earned and the real wages received by the population residing in the UK (Aron et al. 2012). As
housing involves a product that is highly income elastic, it results in the demand rising with rise
in incomes. This is also a factor that causes a direct impact on the affordability. Studies have
shown that the richest 5% of households have undergone the highest increase in income, while
the poorest 5% have undergone lower rises in income. With respect to this it can be asserted that
demand for housing is increasing due to the population moving from low income to high income
levels. This increase in demand is again explained graphically with the help of the following
diagram, where as demand rises, the demand curve shifts to the right and the prices rise in turn as
in the above cases, from P0 to P1.

8FACTORS AFFECTING HOUSING PRICES IN UK
Figure 3
Source: Created by author
Interest Rates- The most important factor that influences the price of houses in the UK
is the level of interest rates as the general level of interest rates in UK has its own impact on the
mortgage interest rate payments. In UK unlike the rest of the continent, the mortgage interest
payments are variable unlike elsewhere in the continent, where the rates are fixed more or less.
Variable mortgage payments cause the amount of affordability to change which has its own
impact on the demand for houses as mentioned above (Anundsen and Jansen 2013). The rates
being variable fluctuate when the Bank of England announces a change in the base rates of the
mortgage payments. This in turn causes a change in demand as mortgage payments take up a
large portion of the income of an individual’s personal disposable income. The variable
mortgage rate has reduced from 6.50% to 2.05% causing an increase in demand as portrayed in
the following diagram, causing the demand curve to shift to the right from DD to D1D1 and
causing the price to rise from P0 to P1.

9FACTORS AFFECTING HOUSING PRICES IN UK
q
p
S
S
D 1
D 1
D
D
P0
P1
Q0 Q1
Figure 4
Source: Created by author
Renting Costs – The cost of renting also contributes significantly, to the demand for
housing and real estate in the UK. Studies suggest that the average cost of renting in UK has
increased by 22%, causing the demand for houses to even rise higher especially after 2011
(Oxley and Smith 2012). This is so because for the population residing, it is a better option to
invest in a house owned rather than paying such high rents. This in turn instigates the buyers to
increase their budget capacity for buying a house. This again causes the demand curve to shift to
the right (from DD to D1D1) and the price to rise from P0 to P1, which is shown in the following
diagram.

10FACTORS AFFECTING HOUSING PRICES IN UK
q
p
S
S
D 1
D 1
D
D
P0
P1
Q0 Q1
Figure 5
Source: Created by author
Availability of Mortgage- The availability of mortgage also pays an important role in
shaping the demand for housing and real estate. As the number of mortgage instruments are
being reduced by the banks in the UK, the population in UK is finding it difficult to finance the
property. Studies suggest that the Credit Crisis of 2008 led to the fall in availability of finance for
mortgage (Becker, Osborn and Yildirim 2012). This can be explained better with the
understanding of the fact that mortgage lending depends on how strong the inter-bank lending is
in a country. Hence, as this criteria was hampered due to the Credit Crisis of 2008, the number of
mortgages lent and the number of mortgage instruments used fell invariably. This is the only
demand side factor that acts in a way which is different than the rest of the factors (illustrated in

11FACTORS AFFECTING HOUSING PRICES IN UK
P
Q
P1
P0
Q0 Q1
S
S1
D 1
D
the graph below) as it is causing the demand to fall (from D to D1) and the prices (from P0 to
P1) and quantity demanded (Q0 to Q1) to fall subsequently. However, the effect of all the other
factors dominates the effect of this one factor, ultimately leading to rise in prices.
Figure 6
Source: Created by author
Supply Side Factors (Short Run)
Cost of Production – The cost of producing is one of the most crucial factors that
majorly impact the supply of houses in UK. This includes not only the cost of buying the land