Demand for Housing depends on various factors
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
Interesting article – but I note that the real reason for house price increase was left until last and only briefly mentioned at all – i.e. the fact that institutions have been lending more money than they should have been.
If low interest rates were instrumental then why were there not similar hikes in the 60′s.
The fact that house prices are rising faster than earnings discounts your first point.
Consumer confidence does not really enter the equation – there is more of a scramble to get on the ladder as everyone needs a roof over their heads.
The simple fact is that – in a market where purchases are made on credit and the goods are a necessity rather than a luxury – price is dictated by how much institutions lend.
In simple logic the causal link is as follows: -
one ‘buyer’ is offered an affordable mortgage at say 3 times salary
a second ‘buyer’ is offered an unaffordable mortgage at 4 times salary but accepts the increased debt in order to get ‘a foot on the ladder’.
The first buyer also wants a ‘foot on the ladder’ so goes to another agency and manages to get 5 times salary.
The demand for the house has not gone up – there are still 2 buyers – but the price has risen by 40% because institutions are lending recklessly.
The only thing that stops this reckless lending is ‘moral hazard’. i.e. people default in payments and institutions are left out of pocket.
As has now been proved, however, the government will not let these institutions fail and bails them out – giving them further incentives to lend too much money as they cannot lose.
As to the winners and losers: -
Winners – institutions who receive massive amounts of extra interest over a 25 year period by artificially inflating house prices. They are laughing all the way to their own bank.
Winners – those people rich enough to have mulitple properties and who are able to sell off additional housing when the market is in the ascendency.
Losers – the people who buy the excessively priced housing pay massive amounts of extra interest over prolongued periods especially when they encouraged to remortgage on an annual basis so that they can have the holiday they always dreamed of (and then end up paying for it over 25 years). In addition these people then contribute to the bail out of the institions who should not have lent them the money in the first place. Double whammy then for the poor home owner!!
Of course the slick PR around financial institutions is very good at maintaining the illusion that the average person continues to benefit from an increase in house prices. Any logical review, however, shows that, as house prices rise, the man in the street merely becomes more indebted.
If you doubt any of the above logic then ask yourself a simple question: -
If the most you could borrow was 3 times your salary what would happen to house prices?
Your blog is great.