Economics for Business: Factors Influencing Rental Housing Prices

This report, focusing on Economics for Business, analyzes the UK rental housing market. It begins with an introduction to the application of economic principles, specifically supply and demand, to the housing sector. Task 1 provides a detailed supply and demand analysis, identifying factors that influence the price of private rental housing, including location preferences, property quality, and economic indicators like interest rates and inflation. Statistical data on rental demand across various UK cities is presented. Task 2 examines governmental and economic policies used to influence the demand for private rental housing, such as rent controls and interventions to stimulate demand. The report concludes by summarizing the key findings and emphasizing the importance of understanding economic principles in the context of the housing market and the impact of various factors on rental prices. References are provided at the end of the report.

Economics For Business

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Supply and demand analysis for identification of factors that influence price of private rental
housing...................................................................................................................................1
TASK 2............................................................................................................................................5
Governmental or economic policies used to influence demand for private rental housing in
UK..........................................................................................................................................5
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................9

INTRODUCTION
Economics for business mainly covers the issues that are facing by present business,
where it helps in examining all factors including financial crises to operations, that affect a
particular industry. The housing market is considered as perfect example to understand economic
theory, which helps in analysing the way supply and demand fluctuate business. Investigating on
this topic, in present report, will lead to evaluate how prices of house, especially private rental
housing is heavily depending on law of demand and supply. The main purpose for investigation
is to explain number of determinants regarding with rental values of commercial property, in
order to highly rental volatility and reason behind same. Furthermore, economic or governmental
policies that may use for influencing demand for the same in UK, is also demonstrated, with
recommendations to stimulate demand of rental housing.
TASK 1
Supply and demand analysis for identification of factors that influence price of private rental
housing
Supply and demand law refers to be the basic but one of the important economic
principles, which explains how certain factors like taxation, population and more, affect pricing
of products or services. It states that higher demand of a commodity result in increasing price of
same and vice versa. But both these topics work against each other i.e. excessive supply of a
good reduces its prices at market while not having enough supply, increases the same.
Considering this fact, in case of housing market, increasing demand for purchasing house or
taking it on rent, results in increasing its price. Whereas, if there is glut of availability of same in
certain marketplace, then it results in reducing pricing of house with decrease in demand.
Therefore, it is analysed that rental housing market is relied heavily on this economic principle
(Law of supply and demand), where each transactions involves both landlord and tenants.
Although, real estate if considered as prominent within industry, but it takes long time for
constructing new homes, fixing up old ones then find buyers and sellers for transactions. In
context with UK, it is one of the overcrowded European nation, where housing challenge is
enormous as well as need adequate attention, because majority of population (including
residents, non-residents and migrants) lives in rented property.
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As per rental management platform, it has been analysed on the basis of rental listing
proportionality, demand for rental housing is high across twenty-three cities of UK, including
London's each borough. Newport is at top most tenant demand with 35%, while Bristol at 34%,
Nottingham at 33% and more (Most in demand areas in the UK to rent a property, 2020). Other
than this, London is having over 38% demand for rental housing as shown below –
Table: Demanded locations of UK for rental housing
Top Highest Locations Top Lowest Locations
Location Demand Location Demand
Newport 35.00% Aberdeen 5.00%
Bristol 34.00% Swansea 8.00%
Nottingham 33.00% Leeds 9.00%
Cambridge 33.00% Edinburgh 10.00%
Belfast 25.00% Birmingham 14.00%
Plymouth 23.00% Cardiff 14.00%
Portsmouth 23.00% Newcastle 14.00%
Bournemouth 23.00% Liverpool 15.00%
Leicester 18.00% Sheffield 16.00%
Manchester 18.00% Southampton 16.00%
Thus, all these statistical data indicate that these cities and boroughs provide a great
opportunity in increasing economy, especially for investors of buy-to-let due to consistently raise
demand of tenant and availability of stock at lower level. Furthermore, while looking at
investment, high demand for rental housing and affordable initial cost indicates high return on
investment. It would aid to generate huge amount of income for landlords, real estate agencies
and construction industry too. As per macroeconomic analysis, housing is considered as the most
essential need to fulfil necessity of shelter. But due to certain conditions like taxation, low level
of income and more, mostly people belong to middle or lower classes are not in condition to
purchase houses. Along with this, people belong from other nations, states or areas, also
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depended on taking house on rent. However, apart from increasing such demand of housing rent,
there are number of factors present which influence the same. It includes taxations, economy
inflation, interest rate, infrastructure, affordability and more. These factors help in determining
the price of rental housing in UK, in following way –
Demand side factors
Preferences for particular locations, size, interior quality, accessibility of market or local
transports, number of rooms, accommodations and more, are some factors that influence demand
of housing and ultimately prices of same, as well. Along with this, attractive property, allowance
of taking pets, safety and well-maintained conditions, are considered as the main factors for
satisfying the basic need of tenats for shelter.
Supply side factors
Factors which affect supply and price of rental housing includes return on investment to
builders, landlords and real estate agencies (brokers), where if profitability is high then builders
used to undertake new construction project or refurbishment of existing ones to meet increase
demand of housing for particular area. Therefore, landlords, private construction or real estate
firms, used to provide high-featured accommodations for maximise the satisfaction of tenants.
Supply and demand analysis
Through supply and demand analysis of rental housing market, factors which may affect
cost-burdened households can be demonstrated easily. Cost of renting however, seems to be
more for landlords where relatively they have to pay higher depreciation rates, comply with
number of ordinances, higher cost for maintenance and more. Along with this, landlords also pay
higher rate of interests on mortgages. Due to these factors, to gain high return on investment,
landlords demand more money to give their homes on rent. This would raise price of housing for
tenants. In this regard, it has been analysed that affordability is one of the main factor that arise
barriers for tenants and house-owners while seeking shelter. Under this condition, owners who
fail to meet preferences of tenants, will offer their houses on less price.
Considering the growth and prosperity of economy, high-income from households used
to demand more rental units with higher quality. Furthermore, affordability is the major
concerning point for tenants to take house on rent, because due to increase mortgage rates,
landlord will tend to offer homes on high rental price to cover cost (What are the Largest
Factors Affecting Investment Property Rental Rates?, 2020). This would lead to decrease
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demand of housing in particular area, because people will focus on purchasing house instead to
take it on rent. Similarly, high-tech economy is another main factor which creates consequences
for the rental and local housing. As increasing growth of economy results in increasing price of
commodities, including pricing of house as well, whereby, it prices of housing once increased
then it will result in a housing crises. Therefore, for various tenants, it will not possible for them
to meet their basic necessity of shelter due to availability of housing on high rates. It has been
evaluated that from last two decades, the economic prosperity has created the housing crisis for
various households with high prices where rental rates have been rising relatively more than
inflation. Moreover, considering the increasing demand of tenants especially for metropolitan
areas of UK having high-tech activity, also experienced the increased cost burdens and housing
price for all households. With growth and development of an area due to expansion of jobs,
income has also shifted more toward those workers who are high-skilled. Therefore, housing
production has become more concentrated towards at the high end of market. However, it has
seen that high-tech economy has create employment for skilled workers that enable them either
to purchase homes or take it on rent, but less-skilled households and people having less
knowledge about technologies do not get opportunity to earn from higher wages, that ultimately
decrease demand of quality rental units. Therefore, these two main factors that are adequate
income of people and sufficient or enough supply of affordable units, help in determining
availability of housing on affordable rates.
It has been analysed that excessive demand of rental housing also increase price of same,
which may be caused due to number of factors. It includes shortage of supply, migration of
people, affordability to purchase house and more. As shown in below graph, it has been
evaluated that with increase in rented price, demand with quantity of rental house is also
decreasing and vice versa. It has also been evaluated from this graph, that if landlords will decide
that they are not in condition to get satisfactory rate of return when provided rented properties on
less price then they used to withdraw some of their properties from market. Therefore,
through long run supply curve at maximum rent, a smaller quantity of properties will be
available for tenants on rent. This will create condition of excessive market demand due to
shortage in supply.
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TASK 2
Governmental or economic policies used to influence demand for private rental housing in UK
The housing sectors of metropolitan areas, many towns including cities and more, around
the world are considered as targeted area for various different forms of government intervention,
which includes planning regulations, fiscal and monetary policies, subsidies, price ceiling and
direct price controls. Hereby, price controls are referred as legal restrictions for controlling the
housing price which is continuously growing, with increase in demand of same. This may take
two forms viz. price ceiling, which allows to charge maximum price sellers within a level for
luxurious housing or area where homes available on rent are located; and second one is price
floor that sets minimum price for buyers to take rent from tenants. The fundamental purpose of
making policies is controlling rents of rented property, particularly for a sizeable part. This
would aid in improving affordability of apartments and make them available on rent especially
for people having low income, which is mostly belong to vulnerable groups adults who rely on
pensions, families having low per capita income and more, through state welfare assistance.
Along with this, maximum prices of rental housing are justified only on grounds of equity as
well as fairness. Rent controls are also accompanied by laws that gives opportunity to tenants
as security of tenure, under which people who are seeking to settle into new area due to
employment purpose and build some roots, get homes on affordable rates of rental
housing. Furthermore, it has been analysed that to stimulate demand of rental housing and
protect tenants against hike price, regulations are needed to establish, which restricts landlords
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who are reluctant for repairing or improving the properties, to do the same before lending their
properties on rent. Interventions which government of UK need to take include setting of
maximum price of rental housing below then the free market price. Impact of this intervention
can be analysed in terms of supply and demand curve, as shown below –
Similarly, introducing a rent ceiling whereby, a maximum price landlords are allowed to charge
by lending their properties on law, give justification for how much rent can be raised within a
specified area, so that affordability can be maintained to prevent both tenants and landlord from
loss. This would stimulate the demand of rental housing in following way –
Similarly, reducing the return to landlord will tend to control price of rent and make it affordable
for vulnerable group of society in following way –
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Thus, from all these interventions which have made for controlling rents and protecting
tenants from over-exploitation, will help in stimulating demand of rental housing in UK.
CONCLUSION
It has been summarised from all over report that using economic principles like supply and
demand law, factors which influences the market and certain commodities can be analysed
easily. In context with rental housing, through analysing such factors like preferences of people
for accommodations and facilities, interest and mortgage rates paid by owners for maintenance,
affordability and more, etc. are some determinants which highly influences pricing of rental
housing. Along with this, increased demand of housing either for renting or purchasing aid real
estate agencies including construction and building companies, gain opportunity to earn high
return of investment. This would also help in increasing growth of nation as well. For this
purpose, it is essential for government to stimulate demand of rental housing by providing them
on affordable rates to tenants.
Consequences of regulations for price control on rental property can be determined, by
shortage in supply of rented property, because under this conditions, sellers may avoid to provide
their properties on rent, due to less return on investment. Along with this, if they get smaller
return on housing property, then under such condition they will also spend less on properties for
upgrading and maintenance, which may create life-threatening conditions for tenants. Under this
condition, to set maximum price, government also need to regulate economic policies like less
mortgage rates and interest rates, so that cost of maintenance of homes can be reduced. Along
with this, negative externalities or external costs from deterioration may impact on quality of
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rental housing. While if developers used to build luxury housing to gain high incentives and
higher return on investment, then such homes cannot come under the rent control policies of
government. The maximum rent policy also seems to arise problems for tenants to fulfil their
fundamental needs due to lack of accommodations or quality of rental housing. Thus,
government of UK needs to take effective interventions by considering some aspects, like price
ceiling would not result in allocative inefficiency, unintended consequences and equity issues,
because these problems may worse the condition of shortage of affordable housing in long term.
Through recently study, it has been evaluated that UK Government fails to recognise the
warning signs given by National Landlord Association and Residential Landlords Associations
about rental crises (Buy-to-let tax clampdown has hit tenants ‘hardest’, 2020). This rental crises
indicates that demand of rental housing by tenant is increasing continuously with shortage of
supply of the same, due to exit of landlord from market. Considering the data of 2016, this year
is estimated as longest uninterrupted falling landlord sequence, which is likely to be continued in
2020 also. The top demanded cities of UK for rental housing shows rapid increases in price of
housing, which has made it difficult for tenants to get shelter. Therefore, government needs to
make such policies which attract landlords to make their property available for tenants to meet
their demand. By giving support to landlords for providing new homes rich with quality,
government can stimulate demand more easily. But for this process, it is essential to set
mortgage and interest rates minimum, with high return value on investment for landlords, so that
rental housing can be provided on affordable rates.
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REFERENCES
Most in demand areas in the UK to rent a property. 2020. [Online] Available
Through:<https://www.landlordtoday.co.uk/breaking-news/2020/1/most-in-demand-
areas-in-the-uk-to-rent-a-property>.
Buy-to-let tax clampdown has hit tenants ‘hardest’. 2020. [Online] Available Through:<
https://www.landlordtoday.co.uk/breaking-news/2020/3/buy-to-let-tax-clampdown-has-
hit-tenants-hardest?source=trending>.
What are the Largest Factors Affecting Investment Property Rental Rates?. 2020. [Online]
Available Through: < https://www.accesspmgroup.com/the-top-5-factors-affecting-
rental-rates-for-rental-properties/>.
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