Factors That Affect The Housing Market

apart from consumer confidence, identify two general economic conditions that can affect the housing market and explain their effects. (8 marks)

1. Economic Growth. Demand for housing is dependent upon income. Therefore with higher economic growth and rising incomes people will be able to spend more on houses; increasing demand and pushing 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.
2. Unemployment. Related to economic growth is unemployment. Clearly when unemployment is rising, less people will be able to afford a house. But, the decline in confidence will mean even people with a job may not want to buy.

Other Reasons at No Extra Cost

• Interest Rates. This is not really a ‘general economic condition’. But, a period of high interest rates will cause lower demand for housing. It increases the cost of mortgage payments and reduces the affordability of housing.
• 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.
• Money Markets. This is risen to prominence in recent months as the credit crunch has made lending money more difficult. The top banks and building societies are struggling to raise funds for lending on the money markets. Therefore, they have tightened their lending criteria reducing the number of 100% mortgages and increasing their Standard Variable Interest rates.

UK Experience since 1993

Since 1993, House prices have risen sharply. This is due to a combination of low unemployment, high growth and low interest rates. In the coming months we may see a slowdown in growth. Combined with problems in the mortgage sector many expect house price inflation to fall.