House Prices in UK

Housing Price in UK Free Market
School of Business and Law
Executive Summary
UK housing is a big issue due to the price increase and decrease in recent years and the
population growth in England. The government plays a big role to control the free market of
housing. The factor that controls housing market price is the demand and supply of houses in
England. The demand and supply are affected by several factors like Economic growth,
Interest rate, Consumer confidence, Mortgage industry, Demographics, Speculation, Inherited
wealth, Unemployment, Migration, Government policy, Building cost, Investment in housing
and Location availability. These factors follow the same old rule of demand and supply.
In this assignment I have analyse these factors in terms of price change in UK free housing
market. I focussed on the current and future scenario while discussing the factors. The
outcome of the analysis is that the government holds the key to change housing factors and
the price is going to increase day by day. The demand will increase as the population will
increase and the supply will also increase as the free market is getting better for housing
business in England. Housing price will increase slowly in long term with always higher rate
of increasing demand and slower rate of increasing supply.
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Table of Contents
Introduction...................................................................................................................03
Literature Review.........................................................................................................04
 Law of Demand.................................................................................................04
 Law of Supply....................................................................................................04
 Demand Curve...................................................................................................04
 Supply Curve.....................................................................................................04
 Change in Demand............................................................................................05
 Change in Supply...............................................................................................06
 Elasticity............................................................................................................06
 Deflation............................................................................................................06
Analysis of Factors that Determine the Price of Houses..............................................07

 Demand..............................................................................................................07
a. Economic growth....................................................................................07
b. Interest rate.............................................................................................08
c. Consumer confidence.............................................................................09
d. Mortgage industry...................................................................................09
e. Demographics.........................................................................................10
f. Speculation.............................................................................................11
g. Inherited wealth......................................................................................11
h. Unemployment.......................................................................................12
i. Migration................................................................................................12
 Supply................................................................................................................13
a. Government policy.................................................................................13
b. Building cost...........................................................................................13
c. Investment in housing.............................................................................13
d. Location availability...............................................................................14
Conclusion....................................................................................................................15
References.....................................................................................................................17
Bibliography.................................................................................................................17
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Introduction
The UK housing market and the change is the house prices is one of the most frequent topic
of discussions and debate. The reason behind this being an interesting topic is the price drop
in early 2008 to mid 2009 and the increase from mid 2009 to mid 2010. Another reason is the
demand of houses was always a problem as the supply was never enough to keep pace with
the increasing number of households in last decades. In addition the affordability was also a
big issue as the recession going on. The value of houses increased so much that the house
owners have gained tremendous wealth and the new buyers finds it very difficult to buy.
The two main factors that determines house’s price are demand and supply. However, there
are factors that affect the demand and supply of UK housing market.
1. Demand
a. Economic growth
b. Interest rate
c. Consumer confidence
d. Mortgage industry
e. Demographics
f. Speculation
g. Inherited wealth
h. Unemployment
i. Migration
2. Supply
a. Government policy
b. Building cost
c. Investment in housing
d. Location availability
In this assignment I am going to discuss and analyse about the effect on price of these factors
of supply and demand of housing in UK and compare with the theory. I am also going to
analyse the affects of government policies on the price of housing in UK.
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Literature Review
The law of demand states:

The law of demand states that, if all other factors remain equal, the higher the price of a good,
the less people will demand that good. In other words, the higher the price, the lower the
quantity demanded.
The law of demand results from
 Substitution effect: when the relative price (opportunity cost) of a good or service
rises, people seek substitutes for it, so the quantity demanded decreases.
 Income effect: when the price of a good or service rises relative to income, people
cannot afford all the things they previously bought, so the quantity demanded
decreases.
The law of supply states:
Other things remaining the same, the higher the price of a good, the greater is the quantity
supplied. Producers are willing to supply only if they at least cover their marginal cost of
production.
Demand Curve
A demand curve shows the relationship between the quantity demanded of a good and its
price when all other influences on consumers’ planned purchases remain the same.
Supply Curve
The supply curve shows the relationship between the quantity supplied of a good and its price
when all other influences on producers’ planned sales remain the same.
Supply curve always slopes upwards and demand curve always slopes downwards.
Equilibrium is the market price at which the supply of items equals the quantity demanded.
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A Change in Demand
When any factor that influences buying plans other than the price of the good changes, there
is a change in demand for that good.
 When demand increases, the quantity that people plan to buy increases at each and
every price so the demand curve shifts rightward.
Figure: Right Shift of Demand Curve

 When demand decreases, the quantity that people plan to buy decreases at each and
every price so the demand curve shifts leftward.
Figure: Left Shift of Demand Curve

 When the price of the good changes and everything else remains the same, there is a
change in the quantity demanded and a movement along the demand curve.
Figure: Movement along the Demand Curve
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A Change in Supply
 When supply increases, the quantity that producers plan to sell increases at each and
every price so the supply curve shifts rightward.
Figure: Right Shift of Supply Curve

 When supply decreases, the quantity that producers plan to sell decreases at each and
every price so the supply curve shifts leftward.
Figure: Left Shift of Supply Curve

 A rise in the price, other things remaining the same, brings an increase in the quantity
supplied and a movement along the supply curve.
Figure: Movement along the Supply Curve

Elasticity: How the price of a product affects demand is called Elasticity. Products that are
necessities are inelastic - people will generally pay whatever is necessary to get them.
Deflation: The overall downward movement of prices for goods and materials. [1]
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Analysis of Factors that Determine the Price of Houses
Demand
The demand for houses in UK has increased rapidly. The new houses building rate is very
low compared to the increase in demand. For house prices to fall, the demand for houses
needs to fall extensively. Following is a table that shows the future predicted increase in
households in London.
Thousands Change As
2006 to 2031 percentage
2006 2016 2026 2031 Per Percent of total
year
(000)
Married couple households 9,395 9,115 9,129 9,179 -9 -2% -3%
Cohabiting couple households 2,188 3,031 3,574 3,804 65 74% 26%
Lone parent households 1,663 1,852 1,976 2,021 14 22% 6%
Other multi-person 1,446 1,648 1,816 1,914 19 32% 7%
households
One person households 6,822 8,460 10,178 10,899 163 60% 65%
All households 21,51 24,107 26,674 27,818 252 29% 100%
5

Private household population 49,85 53,769 57,617 59,287 377 19%
5
Average household size 2.32 2.23 2.16 2.13
(persons/household)
Table: household projection by household types [2]
As the demand is increasing at high rate and the people have to buy houses at each and every
increase in price, the demand curve has a rightwards shift.

a. Economic growth:
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Economic growths have a big control over the housing demand. If the income of a person
increases then that person is likely to be able to pay the mortgage payments and will demand
his own house. So the demand will increase. In UK last few years the economical growth was
poor due to recession and for that reason the income fall down and the demand of house has
also fall down and still the rate is going negative. So the price will be less and the quantity
will also be less. There will be a left shift in demand curve.
b. Interest rate:
The bank of England determines the interest rate and that affects the commercial rate as well.
An increase in the interest rate will also increase variable mortgage payments and those who
have fixed mortgage interest rate also have to increase payment when the fixed time is over.
So a trend in increasing interest rate the UK housing will reduce the demand and a left shift
will occur in demand curve. Interest rate increase sometimes has a delayed affect and that
will also cause a decrease in demand in long run. Due to recession currently the bank of
England reduces the interest rates.
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Figure: Interest rate decrease of Bank of England

So the demand of houses will increase as people will buy house thinking of short term. The
demand curve shifts right.
c. Consumer confidence:
During the time of high consumer confidence the people are willing to take more risk of
taking a mortgage for new house. People often take mortgage with higher debt than income
ratio thinking the future housing market will be more beneficial due to increased rate of
households. This increase the demand of houses and increase in price. So there will be a right
shift in demand curve.
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d. Mortgage industry
Mortgage industry plays a vital role in the demand of housing. If they are willing to provide
the consumers with variety of mortgage schemes that tends to a high demand for buying
house. However, the global credit crunch of 2008 has reduced the willingness of banks to
lend mortgages a lot. At this moment the banks are not providing with different options for
people and the demand of housing is decreased. This causes a left shift in demand curve.
e. Demographics
The number of households is increasing in England. The number of one person household has
always been higher and will be even more in future.
Demand for housing in the UK has been increasing for various reasons such as:
 An increase in divorce rates
 An increase in net immigration from Eastern Europe.
 Increase in life expectancy and more old single people
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 Children leaving home early

 Less marriage
So this will cause a great demand of housing. So, the demand curve will shift right.

f. Speculation
People always don’t buy house to live in. People does buy-to-let business and they sometimes
don’t think about the return is positive or negative. The investors buy many houses together
and also when they sell they sell them together. So they make the market unpredictable.
Some people claim they are willing to be in this business for a long time. The increase rate of
rent in UK is the reason for that and as the houses are expensive to buy renting is the only
substitution of housing. The ultimate result is more houses bought by buy-to-let business
people. This also increases the demand and demand curve shifts right.
g. Inherited wealth
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Inherited wealth also has a lot affect on housing in UK as many people uses the wealth to buy
houses. Sometimes the parents help their children with money to buy their first house. So the
increasing price does not bother people that much as they are finding way to gather extra
money. This leads to demand increment and the demand curve shifts right.
h. Unemployment
Unemployment is also a factor in housing in UK. Due to recession the recent job market is
not so easy and that leads to unemployment. Without earning money the people can’t
consider buying houses, not even with mortgages. This decreases the demand of houses. The
demand curves shifts to left.
i. Migration
Migration is also a factor in housing in England. Lots of people from other country comes
and study, works and does come to live in England and every year the rate of migration is
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increasing. Those people buy houses here and that increases the demand of houses. So the
demand curve shifts right.
Supply
In the short run Supply of housing is fixed because it takes time to build houses. So in the
short run demand affects prices more than supply. In the long run the supply depends on may
factors.
a. Government Policy
Due to government policy the supply of houses is decreasing. The government does not give
planning permission so easily. The environment, congestion, health and safety reasons are
constrain to provide permission. The government does not permit for high rise buildings. The
space around the house should be enough for the people living that area. These are the reason
the number of new houses in an area is not increasing at a good rate. So the supply is
decreasing and the supply curve has a shift at left.
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b. Building Cost
The building cost is another factor that decreases the supply of houses. To make a new house
certain criteria have to be met which increase the expense of British house building
organizations. The cost of the building material is increased and labour cost is also high.
These are the reason for high cost and price of new buildings. Sometimes even the
opportunity cost is better in other investments than housing. So the supply is getting low and
the curve shifts to its left.

c. Investment in housing
The government is looking for housing solutions and the businessman are looking for better
investments. Recently Government are taking measures for improvement business
opportunity in this field. One action is reducing the interest rate. The future population needs
better supply of living space. For this reason, the future of housing is good and investors are
becoming interested to invest in this project. So there will be more supply and supply curve
will shift right.
Figure: Right Shift of Supply Curve
d. Location availability:
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The population of UK is growing but the area is not. People usually like to see more houses
are building but not in their local area. The important locations are saturated already so the
builders have to find remote are for new houses but people don’t choose to stay there that
much. So the demand for houses is dependent on location and at desired location the supply
of houses is less. As the business is not profitable in free area the supply is less and the
supply curve shifts left.
Conclusion
The price of housing was increasing till 2008 before the recession and from 2008 to 2010 the
price was decreasing and currently we are expecting that the price will increase again in
future as the demand of housing is going to increase as the economic growth, mortgage
industry and unemployment factors will become better for housing in time. The supply will
also have to increase due to the actions taken by government to ensure that people meets their
demands. Following is the trend of price increase and decrease in England.
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Figure: Price of Houses [2]
At the current situation as the price is increasing and the supply is decreasing over a short
period of time with an increasing demand the demand curve will shift to right and the supply
curve will shift left.
Figure: Left Shift of Supply Curve Figure: Right Shift of Demand Curve
If the supply constrains factors improve then the supply will increase again. In an ideal
situation, at a certain point demand and supply will become stable and at equilibrium point
where the demand for houses and the supply for houses will be the same. This is an ideal
model that might not be achievable due to the higher rate of increasing demand and price.
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Figure: Equilibrium Point
UK housing price is a major issue of government at this moment. The policies that
government will take will have the power to solve the current dilemma of pricing in housing
industry.
The price of houses in UK free market will increase slowly from now on as the demand will
increase faster than the increment of supply.
References
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[1] Investopedia, (2010) Economics Basics: Demand and Supply [online] Available:
http://www.investopedia.com/university/economics/economics3.asp [Accessed: 15 June
2010]
[2] Communities (2010) Housing Statistical Release: Household Projections to 2031,
England ISBN: 9781409812853[Online] Available:
http://www.communities.gov.uk/publications/corporate/statistics/2031households0309
[Accessed: 15 June 2010]
[3] House Price UK (2010) UK Housing Market [online] Available: http://www.uk-
houseprices.co.uk/housing_market/factors_affecting_prices.html [Accessed: 15 June
2010]
[4] Finance Blog, (2010) Why Houses Price So Expensive [online] Available:
http://www.mortgageguideuk.co.uk/blog/uk-housing-market/why-are-house-prices-so-
expensive-in-the-uk/ [Accessed: 15 June 2010]
[5] Economics, (2010) Why House Prices in the UK have risen since 1992 [Online]
Available: http://econ.economicshelp.org/2007/04/why-house-prices-in-uk-have-risen-
since.html [Accessed: 15 June 2010]
Bibliography
I. Mastrianna, Frank (2006) Basic Economics, Cengage Learning, Inc.

II. Chrystal Alec, Lipsey Richard, (1997) Economics for business and management. Oxford
university press.
III. Parkin, Michael. 1999. “Mircroeconomics”, 4th edition. Addison-Wesley.
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Housing Price in UK Free Market

School of Business and Law

Analysis of Factors that Determine the Price of Houses..............................................07

The law of demand states:

Figure: Right Shift of Demand Curve

Figure: Left Shift of Demand Curve

Figure: Movement along the Demand Curve

Figure: Right Shift of Supply Curve

Figure: Left Shift of Supply Curve

Figure: Movement along the Supply Curve

Analysis of Factors that Determine the Price of Houses

Figure: Right Shift of Demand Curve

Figure: Left Shift of Demand Curve

Figure: Interest rate decrease of Bank of England

Figure: Right Shift of Demand Curve

Figure: Right Shift of Demand Curve

Figure: Left Shift of Demand Curve

 Children leaving home early

Figure: Right Shift of Demand Curve

Figure: Right Shift of Demand Curve

Figure: Right Shift of Demand Curve

Figure: Left Shift of Demand Curve

Figure: Left Shift of Demand Curve

Figure: Left Shift of Supply Curve

Figure: Left Shift of Supply Curve

Figure: Right Shift of Supply Curve

Figure: Left Shift of Supply Curve

Figure: Price of Houses [2]

Figure: Equilibrium Point

I. Mastrianna, Frank (2006) Basic Economics, Cengage Learning, Inc.

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