Factors that affect the housing market


The UK housing market is quite volatile. In the past few decades we have seen two major booms and busts.  This is a look at factors that influence the housing market and house prices.

  • Economic growth. Demand for housing is dependent upon income. With higher economic growth and rising incomes people will be able to spend more on houses; this will increase demand and push up prices. In fact, demand for housing is often noted to be income elastic (luxury good); rising incomes leading to a bigger % of income being spent on houses. Similarly in a recession, falling incomes will mean people can’t afford to buy and those who lose their job may fall behind in their mortgage payments and end up with their home repossess.
  • Unemployment. Related to economic growth is unemployment. Clearly when unemployment is rising, less people will be able to afford a house. But, even the fear of unemployment may discourage people from entering the property market.
  • Interest rates. Interest rates affect the cost of monthly mortgage payments. A period of high interest rates will increase cost of mortgage payments and will cause lower demand for buying a house. High interest rates make renting relatively more attractive to buying. Interest rates have a bigger effect if homeowners have large variable mortgages. For example, in 1990-92, the sharp rise in interest rates caused a very steep fall in UK house prices because homeowners couldn’t afford the rise in interest rates.
  • Consumer confidence. Confidence is important for determining whether people want to take the risk of taking out a mortgage. In particular expectations towards the housing market is important; if people fear house prices could fall, people will defer buying.
  • Mortgage availability. In the boom years of 1996-2006, many banks were very  keen to lend mortgages. They allowed people to borrow large income multiples (e.g. five times income). Also banks required very low deposits (e.g. 100% mortgages). This ease of getting a mortgage meant that demand for housing increased as more people were now able to buy.   However, since the credit crunch of 2007,  banks and building societies struggled to raise funds for lending on the money markets. Therefore, they have tightened their lending criteria requiring a bigger deposit to buy a house. This has reduced the availability of mortgages and demand has fallen.
  • Supply. In the Irish property boom of 1996-2006, an estimated 700,000 new houses were built. When the property  market collapsed, the market was left with a fundamental oversupply. Vacancy rates reached 15%, and therefore with supply greater than demand, prices fell. (Irish house prices fall 50%)


By contrast, in the UK, housing supply fell behind demand. With a shortage, UK house prices didn’t fall as much as in Ireland.

  • House price to earnings ratio
house-price-incomes UK

The ratio of house prices to earnings influences the demand. As house prices rise relative to income, you would expect less people to be able to afford. For example, in the 2007 boom, the ratio of house prices to income rose to 5. At this level, house prices were expensive, and we saw a correction with house prices falling. House prices may have fallen further, but interest rates were low and supply of housing limited.


Another way of looking at the affordability of housing is to look at the % of take home pay that is spent on mortgages. This takes into account both house prices, but mainly interest rates and the cost of monthly mortgage payments. In late 1989, we see houses become very unaffordable because of rising interest rates. This caused a sharp fall in prices.

  • Geographical factors. Many housing markets are highly geographical. For example, national house prices may be falling, but some areas (e.g. London, Oxford) may still see rising prices. Desirable areas can buck market trends as demand is high, and supply limited. For example, houses near good schools or a good rail link may have a significant premium to other areas.


This graph shows that first time buyers in London face much more expensive house prices 7.5 times earnings compared to the north, where house prices are only 3.1 times earnings.

UK Housing Market since 1976


Between 1993-2007, there was a strong increase in house prices have risen sharply. This was due to a combination of low unemployment, high growth and low interest rates. Between 2007-2009 house prices fell as a result of:

  • Credit crunch and a decline in bank lending
  • House prices became over-valued in boom years meaning few first time buyers can afford now.
  • Recession and rise in unemployment discouraged many from buying.



10 thoughts on “Factors that affect the housing market

  1. I’M a research student and wanted detailed information on the above topic. the information is satisfactory though not that detailed.

  2. I’m a research student and wanted detailed information about: ” An analysis of the key factors which impact the decison to buy a house” could you sent me a litte information above this.

Comments are closed.