Factors affecting supply and demand of housing


A look at factors affecting the demand and supply of housing. In summary. Demand-side factors 1. Affordability. Rising incomes mean that people are able to afford to spend more on housing. During periods of economic growth, demand for houses tends to rise. Also, demand for housing tends to be a luxury good. So a rise …

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Factors that affect the housing market


The housing market is influenced by the state of the economy, interest rates, real income and changes in the size of the population. As well as these demand-side factors, house prices will be determined by available supply. With periods of rising demand and limited supply, we will see rising house prices, rising rents and increased risk of homelessness.

Factors determining house prices


Main factors that affect the housing market

  • 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 on their mortgage payments and end up with their home repossessed.
  • Unemployment. Related to economic growth is unemployment. When unemployment is rising, fewer 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 compared 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 many homeowners couldn’t afford the rise in interest rates.

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How the housing market affects the economy


A look at how the housing market and changes in house prices affect the rest of the economy. In summary: Rising house prices, generally encourage consumer spending and lead to higher economic growth – due to the wealth effect. A sharp drop in house prices adversely affects consumer confidence, construction and leads to lower economic …

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Housing supply in UK

A fundamental problem in the UK housing market is the persistent shortage of housing. The number of households is forecast to grow by 232,000 a year until 2033, and yet the current rate of home construction is struggling to increase above 150,000-200,000 a year.

According to Crisis, there is a backlog of nearly 5 million households with unsuitable accomodation.

There is currently a backlog of housing need of 4.75 million households across Great Britain (4 million in England). Around 3.66 million households are in housing need and are currently concealed and overcrowded household, those with serious affordability or physical health problems and people living in unsuitable accommodation.

In 2007 the Government set a target of increasing the supply of housing to 240,000 additional homes per year by 2016. (link) Within this overall target was a commitment to deliver at least 70,000 affordable homes per year by 2010-11, of which 45,000 were to be new social rented homes. However, since the credit crunch of 2008, this target has severely fallen behind as housing construction has slumped.

Policies to deal with expensive house prices in the UK have sometimes focused on demand side approaches, such as “Help to Buy” which offers credit to groups of young home buyers. But increasing the availability of credit doesn’t directly address this problem.



Source: House building Quarterly Dec 2012

Housing completions have fallen close to 100,000 a year – well below the level needed to meet the growth in the number of households.

new-house-builds-2006-16-17Source: GOV.uk – Live tables on new housing

There is hope improved mortgage availability will increase private sector construction. But, it doesn’t resolve other issues, such as planning regulations and local opposition to building homes on a large scale.

New housing

Demand growing faster than supply


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Graph showing that demand for housing stock has been growing faster than net additions to the housing stock, pushing up house prices.

source: Understanding supply constraints in UK housing market, Shelter

Forecasts for future number of households

Despite a lack of housing supply, the number of households in England is projected to grow to 27.5 million in 2033, an increase of 5.8 million (27 percent) over 2008, or 232,000 households per year. (Household projections 2008-2033 – Data.gov)

Problems of high house prices in the UK

In the UK, house prices have shrugged off both the credit crunch and the longest recession on record. After a blip in 2007-08, house prices are at record levels. It means that UK house prices are relatively very expensive; UK house price to earning ratios are amongst the highest in the developed world. Unfortunately, there …

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History of UK Housing


A look at the major trends in UK housing in the past century, including the trends on housing tenure, house prices and the supply of new houses. Victorian housing The Industrial Revolution saw rapid growth in inner cities as people flocked to the city for new factory jobs. This accommodation was often hurriedly built by …

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External benefits in housing market


Readers Question: Could you please explain how positive externality (external benefit) lead to market failure in property industry? A positive externality occurs when a third party benefits from the production or consumption of a good. In many cases, building the right kind of housing can have benefits to the rest of society. Therefore, the social …

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UK House Price to income ratio and affordability


An examination of UK house price affordability.


This shows that for first-time buyers the average house price is over five times average earnings. This is much higher than previous historical trends.

There is also a regional disparity. WIth the ratio of house price to earnings over 10 times in London.

In many parts of the country, potential buyers are being kept out of the market due to house prices being much higher than average incomes. For young people especially, owning a home has become increasingly unrealistic because the deposit required is out of most average workers incomes.

UK real house prices since 1975

Real House prices in UK


This shows average house prices – adjusted for inflation. It shows that house prices have risen faster than the average price level.

According to the ONS

  • In Q2, 1992, the house price was £70,000, and average recorded income of mortgage borrowers was £24,000.
  • By Q3, 2017, average house prices are £303,00, and the average recorded income of mortgage borrowers £63,000.

Mortgage payments as % of income

One useful measure of housing affordability is to look at mortgage payments as a percentage of income.

For first time buyers taking on large mortgages, the mortgage payments are still taking up a big % of take-home pay – despite the low-interest rates. The average mortgage payments are lower for average homeowners because many householders took out a mortgage when house prices were cheaper. In this regard, it doesn’t look too bad.


Mortgage payments as a % of income for first-time buyers.

Since interest rates were cut in 2009, mortgage holders have benefitted from low-interest rates, which have made mortgage payments cheaper.

  • However, when interest rates rise, many homeowners will see a nasty shock of rapidly rising mortgage payments.
  • Also, rising house prices have required a bigger deposit. This means many who might be able to afford mortgage payments are unable to get a mortgage in the first place


Uk base rates could rise from historical lows – which will increase the cost of mortgage payments.

Deposits required for first-time buyers


The deposit required has risen particularly for first-time buyers. from 10% of purchase price in 1995 to 23% in 2012.

Affordability index


Median income of mortgage borrowers in UK

income mortgage borrowers
The average income of mortgage borrowers. Source: ONS

The graph shows a significant rise in average incomes of those with mortgages.

  • In 1990, the proportion of people with mortgages on income of over £50,000 was 2.5%. In 2011, the proportion of mortgages by people with income of over £50,000 was 40%.
  • In 2011, only 6.8% of people with mortgages had an income of less than £20,000.  In 1990, 61% of people with mortgages had income less than £20,000
  • There is a similar drop in the % of mortgages held by people under 30 years of age.
  • Source: ONS House price index May 2012

Affordability of UK Housing

house-price-incomes UK. Source: ONS
  • This data shows average house price to income ratios. It is based on the ONS mortgage survey.
  • After peaking at a ratio of over 5.0 in 2007, there has been a surprisingly limited drop in the ratio of average house price to average incomes.
  • The graph also shows that the average advance for buying a house has significantly increased. This is one factor in explaining why the average incomes of those with a mortgage have more than doubled in recent years.

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