Economics of UK Private Rental Housing: Demand and Supply Analysis

This report provides an executive summary of the UK private rental housing market, focusing on the interplay of demand and supply, and the factors determining housing prices. The analysis identifies key determinants like interest rates, mortgage availability, economic growth, unemployment, and consumer confidence. The report also examines governmental and economic policies, such as interest rate and taxation policies, that influence the demand for private rental housing. The study highlights the impact of these factors on the market, including how changes in interest rates, tax regulations, and population demographics affect housing affordability and supply. The report concludes that understanding these dynamics is essential for comprehending the UK's rental market trends and predicting future developments. The findings of this report are valuable for anyone seeking to understand the economic forces at play in the UK's private rental market.

Economics for Business

EXECUTIVE SUMMARY
This report presents the about the impact of demand and supply on the private rental
housing in UK. The main focus of it is to identify the key factors that helps in determining the
housing price in UK. It also evaluated the various policies that can influence the demand of the
private rental housing. Based on findings, the most important factor is the interest rate and
availability of mortgage.

INTRODUCTION
In UK, currently, 5 million families are residing in the privately rented houses. Based on
the standard set, affordable rent should not be more than 30% of income but across UK it is
slightly above this threshold limit in London and Southern England. The high rental cost has
prevented people from living in or moving to London and Southern England which has created
the shortage of key professionals like nurses, teachers in these regions as a result has limited the
economic and social mobility in UK. This report presents about how the price is determined of
private rental houses in UK. It also includes governmental and other policies which has the
strong influence over the demand for private rental housing in UK.
Task 1
Housing supply and demand
The prices of homes is like stocks which depends upon the law of demand and supply. It
is one of the important principles in economics that establishes a link between the supply and
demand and how it impacts the price of goods. When the demand of the housing increases and
supply of it remains low then it will result into increase in price. On the other hand, if the when
there is low demand of housing then the supply of it will increase which will result into decrease
in price (Hall, 2020). The supply and demand mostly work in against of each other until the point
of equilibrium is reached where the supply and demand of the product intersects. The law of
demand states that there will be no or low demand of product when the price is high assuming all
other factors remain constant. The low price of the product drives demand as consumers will find
value in it and purchase more when it is cheaper. In case of law of demand, there is fall in the
price of the product when the supply of the product increases. But as the price of the product
increases, the supply of the same reduces or dropped.
The housing or the property market depends on the movement of supply and demand and
it is the most prominent industry. It involves buyer who places the offer to buy the property
leaving seller with the option to either accept or reject the offer.
Point of equilibrium

Shift in demand

Shift in supply

From the above it can be said that there has been a shift in both demand and supply
because of the change in factors other than price. During the period between 1998 to 2005, the
house prices in UK nearly doubled. The rise in demand was because of the low interest rates,
growing economy, increasing confidence among customers to enter property market.
Main factors determining the price of the private rental housing in UK
It is not so easy to monitor or measure the movement of demand and supply in the property
market. It is because of the reason that it requires a very long duration for building up the
new homes or fixing the older one and bringing in the market. Some of the factors that
helps in measuring and evaluating the prices of private rental housing in UK are stated
below.
Economic growth and real incomes
The demand of house is mostly dependent upon the income of the consumers. When the
economic growth is higher and the income of the people is increasing, then it will enhance the
ability of the people to expand their expenditure on housing. As a result, it has led to rise in
demand which will lead to hike in prices (Pettinger, 2019). The demand for housing is

considered as income elastic because it is considered to be luxury or precious good and rising
income will result into higher percentage of income will be spend on houses. At the time of
recession, the fall in income of the people will mean that they don't have enough money to buy
and in case of loss of jobs, people may not be able to pay their mortgage.
Unemployment
Unemployment is the major factor related to the economic development of the country.
When the rate of unemployment increases, it will result into very few people or households will
be able to afford to buy a house. The fear of being unemployed discourages people to spend
more or enter into the property market as future is certain and no one can predict about the future
related to job and income.
Interest rates
Interest rate is the crucial factor that affects the cost of mortgage and interest payment.
When the interest rate is high, it will lead to increase in the high cost of mortgage payments
which will consequently lead to fall in the demand of the house for buying it. The high rate of
interest will lead to increase in the amount of rent. This factor will have a bigger impact in case
homeowners have large variable mortgages (Kamal, Hassan and Osmadi, 2016). In UK, the
homeowners prefers to take variable mortgages. So, if there is any variation or changes in the
base rate then it will affect the interest payment on mortgage. It is also a very important factor in
determining the affordability of housing. Mortgage payment takes on an average 25% or more of
disposable income of the people. A small change will also affect the buying needs of the people.

In the year 2008-09, interest rates were reduced to 0.5% but even though the demand
remained very low because of the impact of other factors such as recession and the increasing
rate of unemployment.
Consumer confidence
It is the most important factor in identifying whether consumers are ready to take risk in
respect to taking out the mortgage. It completely depends upon the confidence level of the
consumers (Salihu and Yusof, 2017). If people expects that the price will rise in the future, then
the demand increases with the hope of gaining wealth.
Mortgage availability
It is also an important point that assists in determining the demand for houses which is
based on the willingness or intention of banks to provide mortgages. In case, mortgage is
provided with higher multiples of income, then it will increase the demand for houses. It
completely depends upon the strength of the lending sector. Because of the 2008 recession, there
was a drastic increase in the lending cost and also there was a decrease in mortgage finance. It
resulted into withdrawal of many mortgage products.

Renting cost
If the renting cost increases, then there are chances that consumers will take chance to
buy a house through mortgage which becomes even more cheaper (Mulheirn, 2019). In UK, the