Definition of the housing market

The Housing Market refers to the supply and demand for houses, usually in a particular country or region. A key element of the housing market is the average house prices and trend in house prices.

house-prices-nominal-1952-2020

Definitions related to housing market

  • UK nominal house prices – actually monetary value – not adjusted for inflation
  • Real house prices – house prices adjusted for inflation, e.g. if prices rise 10%, but inflation was 2%, then real house prices rose 8%
  • Mortgage equity withdrawal – when homeowners re-mortgage house and take equity withdrawal.
  • Affordability index – how much percentage of disposable income is needed to keep up with mortgage payments – rents.
  • Buy to let – When investors buy houses with the intention of renting out the house to gain income from rent and hopefully capital gains.
  • Capital gains – when investors see a rise in house prices
  • Negative equity – when a homeowner has an outstanding mortgage bigger than the value of the home. If they sold their house, they would still owe money from the initial mortgage
  • Real interest rates – nominal base rates – inflation rate
  • Base rates – the interest rate set by the Bank of England; this base rate has a strong influence on the other interest rates in the economy. Banks will usually alter their lending rates in response to a change in the base rate.
  • Fixed-rate mortgage – a mortgage where the interest rate is set for a number of years e.g. 2,5,10 years
  • Variable-rate mortgage – a mortgage where the interest rate is linked to the Bank of England base rate and so mortgage payments will change with changes in the interest rate.
  • Interest-only mortgage – when homeowners take out a mortgage which only involves paying the interest on the loan and not any principle on reducing the outstanding loan.
  • Generation rent – the young population who cannot afford to buy, but have to rent.

Real house prices 1975 – 2015

real-nominal-house-prices

A comparison between real house prices and nominal house prices.

The Housing Market includes the following features

  • Supply of housing – quantity of housing stock
  • Demand for housing
  • House prices
  • Rented sector. Buy to let investment and demand from tenants
  • Government intervention in the Housing market

Factors which affect the Housing Market

factors-affecting-house-prices

  • Interest rates – which influence cost of variable mortgages
  • State of mortgage industry – determines whether people are eligible for mortgages
  • Economic growth, incomes and unemployment rates
  • Population and demographic trends

Features of UK Housing Market

  • The UK Housing Market is often volatile because of various factors.
  • The UK Housing market has an influence on the wider economy. e.g. when house prices are falling, consumer spending tends to decrease.
  • Because the housing market influences the economy and individual homeowners, it is important to try and be able to predict future movements in the housing market.

Homeownership rates

home-ownership-by-tenure-english-housing-survey-2019
Source: English Housing Survey 2018/19

The main forms of housing tenure are

  • Homeownership – either outright or through mortgage
  • Private renters – renting from private landlords
  • Social renters – people renting from local authorities and housing associations.

Affordability of housing

ftb-mortgage-payments-percent-takehome-pay

One measure of affordability is the percentage of take-home page that goes on a mortgage/ renting. This shows in the late 1990s housing affordability declined due to higher interest rates.

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