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. Continue Reading →