Supply and Demand Analysis of Private Rental Housing Prices in the UK

This report examines the economic factors influencing the price of private rental housing in the United Kingdom. It begins by identifying key determinants such as population growth, taxation, interest rates, income levels, house building, economic growth, and mortgage availability. The analysis utilizes supply and demand curves to illustrate the relationships between these factors and rental prices. The report then shifts focus to governmental and economic policies that can influence the demand for private rental housing, categorizing these policies into demand-side (interest rates, landlord rights, government regulations, and taxation) and supply-side (public and social housing) measures. The report concludes by highlighting the interconnectedness of these factors and policies in shaping the UK's private rental housing market, emphasizing the need for a comprehensive approach to address the challenges of affordability and demand.

Supply and demand analysis

Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Identifying factors which helps in determining the price of private rental housing in the UK...1
TASK 2..........................................................................................................................................10
Identifying and evaluating governmental/economic policies that could be used to influence the
demand for private rental housing in the UK............................................................................10
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Economics is a branch of knowledge which is related with the micro and macro production,
consumption and spending in a nation. The concept of business economics is based on two
pillars which are demand and supply (Pettinger, 2013). These two factors are interrelated and
impacts all other variables. The main aim of this report is to develop an understanding about
private rental housing in United Kingdom and how it is impacted by various economic
dimensions. In the present report, various factors which helps in determining the price of private
rental housing will be identified along with detailed usage of graphs. Furthermore, this report
will include economic policies which can be used to influence the demand of private rental
housing in UK.
TASK 1
Identifying factors which helps in determining the price of private rental housing in the UK
Demand and supply are the concepts which are directly related to price of a commodity.
Both of these concepts share a distinct relationship with the level of price. The law of demand
states higher the price of good is, the lower that good will be demanded. This law works when all
the other variables remain constant and there is no interference of external factors. This
relationship can be well explained using the graph of law of demand.
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(Source: Law of Demand, 2019)
From the above curve, it is evident that when demand of a good increases (from Q1 to Q2
to Q3) then the price of that commodity decreases (from P1 to P2 to P3). This implies that the
relationship between price and demand is inverse.
On the other hand, supply refers to the availability of a product which impact the price of
that specific product. The law of supply refers that higher the price of a commodity is, higher the
quantity supplied will be. This relationship is explained by below graph:
(Source: Law Of Supply, 2019)
From the above graph, it is evident that as the price of a commodity increases (P1 to P2
to P3), its supply also increases (Q1 to Q2 to Q3). The law of supply only works when all the
other factors are constant.
The above relationship of demand and supply with price of a commodity is explained with
the aim of identifying few main factors which can help in determine the price of private rental
housing in United Kingdom.
Private rental housing is an industry of United Kingdom which currently is facing issues as
people no more prefer to rent a private house in UK as the prices are continuously increasing.
This is an issue which economy of UK is currently facing, to address this issue, various factors
which can determine the price of private rental housing are population, taxation, interest rates,
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income effect, house building, economic growth and availability of mortgages. All these factors
identified are discussed below:
Population:
Population is the most important demand side factor which increases the demand of
private rental housing in United Kingdom. The population of UK is continuously increasing and
so as the consumption of rental houses. There are many factors which are combined cause of the
increasing population of UK. The divorces in last few years are increased in this country along
with which number of single people living in this country has also increased. These factors have
hiked the population of UK.
(Source: UK population estimates, 2020)
The above graph sourced from office of national statistics, represents the increasing
population of United kingdom. This increasing population and enhnaced number of households
due to increment in single people has resulted in high demand of private rental housing in United
kingdom. This increased demand is the reason of high prices. So, it can be observed from this
analysis that population and number of households are the determinants of price of private rental
hosuing in UK.
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(Source: Demand-supply curve, 2020)
The above demand-supply curve presents the real case scenerio in which demand of
private rental housing is increasing (from D1 to D2) due to high population and this directly
enhancing the price of private rental housing (from P1 to P2).
Taxation:
This factor is the collectively the value which an individual or artificial person pays to the
government of a nation. Taxation is a charge which is charged at capital gains, income and other
belongings of an individual. This is the factor which can determine the price of private rental
housing of United Kingdom. The people who rents a property does not have to pay the tax but
the person who owns the house has to pay the taxation under property tax. If an individual owner
has to pay high tax for their property, then they will charge high rent for their private housing
property and hence price of private rental housing will increase.
With increasing property taxes in UK, the prices of private rental housing also increasing
by which it can be analysed that taxation is a fair determinant of prices of rental housing in UK.
Interest rates:
Interest is the amount or value which is charged against a loan. The interest rates in a
nation is fixed by the central bank or other governmental authorities of that country. This factor
is a demand side factor which can determine the prices of private rental housing in United
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Kingdom. The amount of loan is not usually used by individuals to pay the rent but it is used to
mortgage a house. If the interest rates on acquisition of houses is high, then people will not be
able to buy a house and will rent a house; this will enhance the demand of private rental housing.
Increased demand of rental housing due to increased interest rates will result in increased prices
of rental houses in UK.
(Source: interest rate decision in UK, 2019)
According to the demand supply curve, when the demand of private rental housing is
increasing, the price of rental housing will also increase. As it can be seen in above graph
sourced from bank of England, the interest rates have been subsequently fallen in UK but after
the introduction of BREXIT, these interest rates have increased due to prices of rental housing in
UK has also increased.
Income effect:
This factor is associated with the income level of the people in a nation. If the income
level of people increases in a nation, then the affordability of houses also increasing. This rise in
house affordability increases the demand of rental houses which ultimately result in price rise of
rental houses.
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(Source: UK earnings growth, 2019)
According to the above graph, it has been analysed that total income of an average
individuial in United Kingdom has been incraesed after 2015 which has increased the
afforadbility of house rent. In this case, due to the demanf shift, the prices of private retal
housing is increased.
House building:
This factor is the supply side factor which can determine the price of private rental
housing in UK. House building refers to the number total builds in a year. If a region has high
builds, then the supply of rental properties will be high which will impact the rental prices of
those properties.
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(Source: Supply of hosuing peperties, 2020)
As it can be seen from above graph, the number of new builds is continuously increasing
in United Kingdom which has increased the supply of housing properties in UK. Due to the non-
interference of any external factor in this case, the law of supply applies according to which if
the supply of rental housing properties will increase then their prices will also increase.
Economic growth:
This factor is a financial metric which determines the growth of a nation. Economic
growth of a country is a collective factor of various elements including such as inflation, national
income, affordability, standard of living and many more. Usually the economic growth of a
country is presented according to its GDP. According to Richard Partington (2020), the
economic growth of United Kingdom is decreasing. As it can be seen in below graph, the
economic growth of UK falls due to the political uncertainty.
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(Source: UK GDP, 2020)
When the economic growth of UK is declining, people capability to buy a house also
decreses due to which they rent a house. Economic growth decline of UK has resulted in
enhnaced demand of private rental housing which has also increased the price of rental housing.
By this analysis, it is evidently evaluated that economic growth is an effective determinant of
price of private rental housing in UK.
Availability of mortgages:
This is a demand side factor which impacts the prices of private rental housing in United
Kingdom. When an individual plan to rent a private housing property, the procure funds from the
mortgages. If the availability of mortgages in that region is high, then the demand of rental
properties will also be high which will lead to price rise of rental properties. If is important to
maintain an equilibrium between demand and supply to constant the price.
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(Source: Equilibrium Quantity, 2019)
According to DANIEL LIBERTO (2019), an equilibrium quantity state is when the there
is no shortage or surplus. If there is an equilibrium in the availability of mortgages, then the price
of private rental housing will be stable but in this situation where availability of mortgages has
risen in 2019 as shown in below graph, the demand and prices for private rental housing in UK
has also increased. This analysis reflects that availability of mortgages is an important
determinant of prices of private rental housing UK.
(Source: Mortgage approvals, 2020)
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Above mentioned factors are the determinants which can determine the price of private
rental housing UK.
TASK 2
Identifying and evaluating governmental/economic policies that could be used to influence the
demand for private rental housing in the UK
As explained in above task, the price rise of private rental housing in UK has lead as an
issue. It is important to control this issue; there are various economic policies which can control
this issue and influence the demand for private housing in UK. Economic policies are the
regulations and standards which government of a nation create for the aim of control the
practices in that country. There are various economic policies which are developed by
government of United Kingdom which can control the demand and price of private rental
housing. These policies are classified into demand side and supply side. The demand side
policies include interest rates, landlord rights, government regulations and taxation. The supply
side policies include public housing and social housing. All these policies are discussed below:
Interest rates – These policies regulate the interest rate which an individual or organisation
has to pay against the amount which is procured by them as a loan from registered financial
institution. Interest rates on loan can vary from bank to bank but government provides maximum
and minimum limit which is required to be followed by every financial institution. In order to
influence the demand of private rental housing in UK, government can change the interest rates
in UK. It is analysed that the demand of private rental housing is high as the interest rates are
increasing in UK due to which individuals are unable to buy their own house and prefer a rented
house. To control this, government can lower down the interest rates in UK by which people of
UK can procure funds at low interest rates and buy their own house which will directly decrease
the demand of private rental housing in UK.
Landlord rights – According to the government of United Kingdom, landlord of a housing
property holds few rights which can be exercised by them over tenants. Government of UK
provides several rights to landlords by which landlord can vacant their property whenever they
want with prior notice. This right influences the demand of private rental housing in United
Kingdom (Private renting. 2020).
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