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Exploring Factors Affecting The Housing Market

Among the four basic needs of human being, shelter is as important as other needs. Every human being wants to live in their own home. Hence, this desire of human being leads to the housing market to flourish. In housing market, different kinds of houses are purchased and sold between buyers and sellers either directly by owners or indirectly through brokers. The houses can be bungalows, apartments, condominiums, villas or country homes. It is also known as Residential Real Estate Market, as selling and buying of houses are nothing but a real estate business.

Factors affecting housing market are as follows:

Economic Growth


Interest Rates

Consumer Confidence

Money Markets

Housing Market in UK

In recent years Housing market has been proved volatile in UK. Over the past year, housing affordability has improved in some market, remained as it is and in some market are declined. In the UK market, the “bubble” markets that had burst generally reached a trough and began rising again. Mostly it did not experience a bubble in the boom market due to the intense economic disruption and the great recession. The increase in the house price in UK has made the housing market increasingly difficult to enter as it rose 90% in between 2002 and 2007 which was faster than other European countries. In the year 2007 the average price of the house was £219,256 which was the half time higher or a total increase of 168%. But in 2008 house price started to fall they have stabilised as of august 2009.

housing market

Source: www.housingmarket.org.uk/nationwide

The above figure shows rising housing prices in UK. The figure also depicts fluctuating housing market every year. After 2007 the house price seems to decline considerably due to high growth and low interest rates, low unemployment, unstable economic condition of the country and a credit crunch.

2. Housing Market Index

This index is an important indicator used by several hundred home builders in the housing market which is also an important indicator of the overall economy. It is an index used by home builders to measure demand for new homes. The index values range from 0 to 100 with 50 indicating an average demand for new homes.

According to house price index published by Communities and Local Government in the year 2010, February the key points include:

UK house prices were 2.9 percent higher than in December and 0.8 percent higher than in November 2009.

UK house prices rose by 2.9% in the quarter ending December 2009. Comparing to the year 2009 of September with a rise of 3.1%.

Annual average house prices rose in England by 3.0%, Wales by 1.0% and Scotland by 3.8% but fell in Northern Ireland by -6.0 %

Annual average house prices paid by first time buyers in December 2009 were 1.5% which is lower than a year ago.

The mix-adjusted average house price in the UK stood at £ 200,307 in December, 2009.


The above figure shows volatility of UK House prices

3. Definition of DEMAND & SUPPLY:

In the context of economics, the factor that has a direct impact on the housing market is demand and supply. The demand as described by Mark Hirschey (2003, p.13) is the quantity of a goods or services that customers are willing and able to purchase during a specified period under a given set of economic conditions. The most influential factors that contribute the incline or decline of housing market are population, unemployment, economic growth (inflation), interest rates, and availability of mortgage.

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In contrast, to supply which is best demonstrated by Anderton .A (2006, p.21) the quantity of goods that seller are prepared to sell at any given price over a period of time. The parameters that have a definite impact on the housing market are availability of planning permission, opportunity cost for builders, and increase in the cost of resources.

The fastest economic growth in two years in 2007 created a record number of jobs in UK, attracting the wave of immigrant worker from Eastern Europe and spurring demand for housing. House prices rose about 10% percent last year and the number of first time buyers fell to 26 year low according HBOS PLC, the country biggest mortgage lender (www.overseasmortgagelender.com). In November 2007 according to chartered surveyors report, which house prices has been fallen down since October 2007 which increases the demand. New buyer’s enquiries stagnated in2007 but still remain strong through the country with demand boosted by rising income, a strong economy outlook and a healthy employment market. According to the figure the demand of the houses increases due to the strong economic condition and income rise shifting the actual demand (D) to (D1) with the equilibrium price (P) to P1 leaving the supply curve constant the quantity demanded and supplied will become Q1 from Q with Qo shows increase in quantity demand.

Year 2008 remains the same in terms of interest rates are concern with population increases in UK with more immigrants flee to UK. The increase in mortgage landing indicates the housing market remains strong savers were making the most of the increase in the interest rates. The UK inflation dropped down to 2% target during august 2008 to 1.8%(www.loanssite.co.uk). These figures make it less likely there will be interest rate rise in the next few months. According to the figure 1.4 that the demand of the houses increases due to the strong economic condition and income rise shifting the actual demand (D) to (D1) with the equilibrium price (P) to P1 leaving the supply curve constant the quantity demanded and supplied will become Q1 from Q with Qo shows increase in quantity demand.

4. Demand and Supply for Housing

Housing Transaction in UK depends on:

The price that the seller agrees to get paid for their property to prospective buyers

The actual price that the buyer is willing and able to pay.

Buyer place the amount for a certain property and seller can either accept or reject the offer.

A Seller Market

Supply is limited when there is a shortage of quality properties which results into the market shifts towards the seller. The obvious reason is the excess demand for good properties in the market.

A Buyers Market

When there is weak demand for both new and old houses the power switches to potential buyers. They can negotiate with the price as they have wider choices available.

A rise in the general price level from P1 to P2 cause a contraction in aggregate demand.http://tutor2u.net/economics/content/diagrams/housing9.gif

The figure shows upward pressure on housing market prices when there is an increase in demand may be due to growing population or increasing incomes.

There is likely to have housing market supply to be relatively inelastic because of time lags between an increase in the supply of available new properties and change in price. Inelastic

supply and outward shifting demand result into the considerably increase in market price followed by less trading of houses.


Demand Side Factors:

Economic Growth/ Real income/Affordability

Increase in income enables people to spend more on buying a house. In the past there was a mortgage ratio 0f 3 times of your salary. The ratio of house prices to incomes has increased considerably between 1995 and 2007. The demand for buying houses fall if the unemployment rises and economy of country goes into a recession. The demand for housing increases with the increase in income.

House prices

The graph shows demand for housing rise with the rise in earnings.

Interest Rates

Rates of interest affect the cost of paying the mortgage as repayments of mortgage are important part of monthly spending of a homeowner.

Consumer Confidence

Buyers are willing to take risk on mortgages during the time of high consumer confidence. People in early 00s used to take mortgages with higher dept because they were optimistic about housing market.

Availability of Mortgage Finance

There were many restrictions in mortgage financing in the 70s but now things changed with the deregulation of banking sector which led increased competition to offer number of mortgage products. Products such as self certification mortgages and mortgages up to 6 times income have enabled people to get more mortgages, thereby increasing demand for housing. The number of products fell due to a shortage of finance in the money markets during the credit crunch of 2008.

Demographic Factors

The number of household in the UK has been rising and there also the single people living alone are increasing. Some of the reasons of increasing demand for houses in Uk are as follows:

Increase in old single people and life expectancy

Increase in divorce rates

Children leaving home at an early stage

Less marriage

Increase in net immigration from Eastern Europe


The investors buy house when prices are rising and dell when market appears to turn. This makes house prices more volatile because speculators will buy in boom and sell in a bust. The price of houses has increased faster than inflation, although the renting has become expensive which is the main substitute to buying a house.

Inherited wealth

Parents are lending their children to but houses using their inherited wealth. Higher house prices are not preventing people from buying house instead they are finding many ways around it.


Where there is high employment there is greater chance to rise in demand for houses.

Supply Side Factors

Demand affects prices of house more than supply in the short run as it takes long time to build new houses. So, supply of housing is fixed. However if the supply of housing is inelastic then an increase in demand will lead to an increase in price.

Factors affecting supply of housing in the long run are:

Availability of planning permission

Opportunity cost for builders as other investments give better returns

Existing houses are unfit to live in.

Profitability of building new houses

An increase in the cost of building new houses will shift supply to the left

The house prices have risen much faster than inflation and earnings in UK.


According to Nationwide the housing prices are rising at 8.6%. The survey says that house price rose by 1.2% in January and is up 8.6% year – on-year. If price manages to sustain their run in popular areas the price level will be unaffordable, the containing house price inflation is that prompts more sellers are willing to come to market as demand dips which leads to increase the house price. As in the year 2009 the housing price almost collapse due to numbers of unemployment rising, harder to borrow and strict rules for the mortgage facilities. But still it happened and there is no improvement on the economic condition of the country the situation will be worst than other years.

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As per the survey by the Nationwide, the coming years housing price will be rising up by the certain percentages, if the economy unconvincing exist from recession, the labour market figure will be improved. Out of recession enhance consumer to raise their average income. The implications for house price cause up and downside because of the aggressive cuts inn the inflation rate. With pay inflation near zero or negative, every additional increase in house price worsens the market to affordable. Until interest rates are very unlikely to fall any further.

This influence the market that pay restraint has allowed more people to stay in work and continued to service their mortgage at current lower interest rate. As a result most of the house holders are forced to sell their houses due to financial pressure.

With consent with the Nationwide, my prediction of the house price will tends to falls because of:

Still this country is not yet fully recovered from the credit crunch and facing the hard financial structure in which numbers of unemployment are rising and still it continues to rise, which is not a good news for the house market.

Top hike of income tax, national insurance weaken their per income capital in which they are bound to be stay as it is.

Higher interest rate that a bank charges for the them borrowing from them, it won’t be lower for the coming years.

As rise of the house more people will be tempted to sell their house. More houses for sale, coupled with the strict rules and regulation of mortgage stop buying in which sellers and the price will tends to fall.


The above study has been carried out by the materials and information provided that were both consistent and inconsistent with current published research. Due to short time and limited resources and the study area being vast, scope of study limits to the topic only. On the basis of the analysis of report presented in this study, the following conclusions are drawn:

The housing market of UK is fluctuating every year due to the instability of the economic condition of the country, recession followed by unemployment, population and etc.

Inflation rate and interest rate are the most essential to bring change in the housing market.

Growing unemployment, redundancy, fewer earners, hike in the income tax, strict rules of banks are the one to affect the housing market to fall down.

Most of the house selling market are influenced by the consumers demand and their desire upon what kinds of house they are willing to buy such as the location, design and infrastructure,

In conclusion the housing trend currently is in panic stage as the market is witnessing near unprecedented house falls at the rate of 16% or more per annum. As the different economist predicts in the past about the housing market has proved that the inflation and the economic condition of the country such as Credit Crunch, Employment Condition has badly affected the housing market. This suggests that the housing market may not embark on a sustainable up trend for as longs as another 4 years and thus points to a period of house price stagnation that will following the current crash in UK house prices.


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