1. Affordability. Rising incomes mean that people are able to afford to spend more on housing. During periods of economic growth, demand for houses tends to rise. Also demand for housing tends to be a luxury good. So a rise in income causes a bigger % rise in demand.

House prices

This graph shows that house prices (and therefore demand for housing can rise much faster than earnings, suggesting there are many other factors influencing demand – at least in the short run.

2. Confidence.

Demand for houses depends on consumer confidence. In particular it depends on people’s confidence about the future of the economy and housing market. If people expect prices to rise, demand will rise so people can gain from rising wealth. In a boom, demand for houses rises faster than incomes as seen in graph above.

3. Interest Rates.

Interest rates play a big factor in determining the cost of mortgage interest repayments.

UK Base Rates

When interest rates reached 15% in 1992, demand for housing collapsed, causing a large fall in demand for housing. The relatively low interest rates of the 90s and 2000s, encouraged more to buy a house.

However, in 2008-09, interest rates were cut to 0.5%. Even though interest rates were very low, demand also remained low. This was because, other factors were reducing demand for housing – like the recession and prospect of rising unemployment.

Population.

A very important factor. It is not just the number of people but demographic changes. e.g. growing number of single people living alone has led to increasing demand for houses.

Effective Demand.

Another factor that determines the effective demand for houses is the willingness of banks to lend mortgages. If banks give mortgages with bigger income multiples, then the effective demand for houses is greater.

Factors Affecting Supply

• Number of new houses being built.
• Planning restrictions on the use of land.
• Profitability of building new houses. This is dependent on demand for houses and prices. In  a boom, builders are usually keener to build more. Falling house prices can lead to a restriction in supply.

Related

• Factors affecting house prices

Real and Nominal House Prices

When we use real house prices, the 1989-93 crash is far more significant than just using nominal numbers. Inflation is this period was quite high. Real house prices fell 36% from 1989 to 1995.

See also:

• house price trends in UK

House Price Trends

Definition of Real house prices – nominal house price growth – inflation.

This gives a better understanding of the relative affordability of house prices. For example, in the late 1980s, inflation reached 11% meaning the nominal house price growth was partly caused by inflation. In the 2000s boom, inflation was much lower. The trend in real house prices reflects a long term trend in house prices. It doesn’t mean house prices will always grow at this rate. It just reflects what has happened in the past.

House Price to Earnings Ratio

The interesting thing is to see how much the house price to earnings ratio for first time buyers fell at the end of the 1990-93 crash. The ratio of house prices to earnings fell close to 2.0.

At the height of the 2007 boom, house price to earnings ratios peaked at over 5.0 and in London at over 7.0. This reflected

• low interest rates
• High mortgage multiples
• Use of parents to get deposits

Although house price to earnings ratios have fallen, they still remain high by historical standards.

UK House Prices since 1985

• House prices peaked in Q3 1989 at £62,782
• They fell until Q4 1992 when they were £50,128
• The next peak was in Q3 2007 at £184,131

House Prices since 2000

Long Term House Prices UK

Graph showing nominal house price growth. Notice two big house price crashes of 1991 and 2008.

Also these figures are not adjusted for inflation. The real house price growth is less. But, house prices have still outstripped the rate of inflation.

In 1952, the average house price was £1,891.

They peaked in Q3 2007 at £184,131

House Price Affordability

This graph shows the fluctuations in house price affordability in the UK. At the height of the 1980s boom, mortgage payments as a % of take home pay were a record 140%. The cost of mortgage payments was heightened by the period of high interest rates.

The following house price crash and decline in interest rates led to a sharp drop in relative cost of mortgage payments. By 1995, mortgage payments were only 45% of take home pay. This helped fuel another boom in house prices. Although interest rates remained relatively low, banks lent mortgages which were a bigger % of people’s income meaning the cost of mortgages soared relative to income.

Annual Change in UK House Prices

This graph shows the annual % change in UK house prices during the past 10 years.

The early 2000s involved a rapid house price boom with the annual rate of house price inflation exceeding 25%.

The boom was caused by:

• low interest rates,
• positive economic growth
• Generous mortgage lending
• high confidence
• relative shortage of supply

The housing crash began in early 2008. The market turned at the end of 2007, at the onset of the credit crunch. Bank lending froze making mortgages difficult to get. This also caused a drop in confidence. At its worst house prices were falling at an annual rate of 15%.

Annual % Change since 1992

Recent House Prices

Real House Prices and Trend in Real House Prices

House Price Growth Annual %

Affordability of Housing

House Price to earnings Ratios

House Price Affordability for first time buyers

Mortgage Lending In UK – a reflection of the credit crunch

Historical Interest Rates in UK

More housing stats

Housing Market stats at ONS

Copyright:

Note Graphs can be reproduced freely on other websites, with link back to www.housingmarket.org.uk/

Gross Mortgage Lending

This graph shows the sharp decline in mortgage lending since the onset of the credit crunch.

Banks have been unable or unwilling to lend because:

Falling house prices mean there is greater risk of negative equity. Therefore banks have been requiring higher deposits making it more difficult for people to buy a house

Lack of funds. Many of the big 4 banks have had to write off substantial bad debts resulting from the credit crunch and subprime mortgage fiasco. Even despite quantitative easing, banks have been unwilling to lend.

Lack of willing homebuyers. Although interest rates of 0.5% make buying a mortgage attractive, homeowners have been put off buying a house because of the scale of the recession and the high levels of unemployment.

The low levels of mortgage lending have led to low levels of activity in the housing market.

Future Mortgage Lending

As house prices stabilise, we are likely to see a rise in future mortgage lending, as banks reduce the deposit required.

Also, economic recovery would reduce the amount of mortgage arrears and increase confidence of consumers to buy a house. However, unemployment is likely to lag behind economic growth so this could take a while to occur.