Why House Prices in the UK have risen in the past 12 years.

1. Inelastic Supply. The number of new houses built in the UK, is approximately 160,000 a year. This may sound a lot but it has been much less than the demand. The % increase in the supply is much less than the % in price. Supply is unresponsive to increases in price because:

• Planning restrictions in the UK are quite stringent. Local councils often have a vested interest in not building new houses.
• There is a shortage of land.
• Takes time to build and get planning permission.

Therefore with inelastic supply, any increase in demand will cause a bigger % increase in price.

The supply of housing varies throughout different regions and helps to explain the marked regional variations in house prices.

The other factors are all related to the demand for housing and include:

1. Rising Population. UK is now over 60 million; often focused in south east
2. Rising number of households. The number of households is rising faster than the UK population. This is because there is a decrease in the average household size, e.g. more divorces, old people living longer, children leaving their parents quicker.
3. Lower long term interest rates. Interest rates have a direct bearing on monthly mortgage payments. Interest rates in the UK have averaged between 5-6% in the past 10 years. lower rates make buying more attractive than renting.
4. Rising Wages. Real incomes have been rising in the UK. This has been helped by a decade of positive economic growth, averaging 2.5%
5. More investors entering the market. The UK housing market has seen an increase in the proportion of housing investors. These investors ‘ buy to let’ i.e. they buy it and rent to other people. A motivation for buying houses is that they hope to make capital gains in addition to rentable income. This has led to a speculative element arising in house prices.
6. More mortgage products on offer. Banks have tried to help the declining affordability of housing by lending bigger amounts, higher income multiples, interest only mortgages and mortgages with high deposits. This means that people are able to buy the more expensive houses; it supports a rise in the house price income multiple.

• (however, this point is now changing quite rapidly)