Housing Prices and Factors in the United Kingdom


The following paper provides information on the UK and the US housing and the real estate industry. The housing industry is one of the most significant sources of investment for both the government as well as the people in a country. This paper analyzes the factors affecting the prices of the housing sector in s free market as well as in a regulated environment. The UK housing market is the focus of this paper. Aside from this the government policies and their effects on the UK housing sector have also been depicted.

Factors Determining the Prices of Houses

The prices of houses are mostly determined by the supply and demand mechanism in the free market. When the demand for houses rises faster than the supply of houses, then the housing prices go up. Similarly when the supply of houses rises faster than the demand then the prices of housing tend to go down. In most cases, the prices tend to increase with the increasing trend for a rise in demand. However, in a more realistic market supply and demand is only the factors affecting the price of housing and property.

The interest rates also affect the price of housing as they form the base rate in an economy. Financial institutions lend money through a mortgage in the housing sector and with increasing interest rates the value of the mortgage payment also increases. This increases the overall price of a property or a house. However, in a region where there are fixed interest rates, the effect on housing prices is minimal. Aside from this, it is also possible for previous interest rates to have effects on the next year’s housing prices.

Demographics of the region also amount to the change that takes place in the price of housing in the region. An increase in migration to a region creates demand for housing raising prices. Aside from this increasing number of single-person households is also increasing the price of housing in the UK. Moreover, the increasing divorce rate is putting upward pressure on the demand for more houses resulting in higher prices.

Another factor that tends to affect the prices in the housing sector in the UK market as well as in international markets is the element of speculation. This is specifically true for the buy to let market where the basis of the purchase and the sale is made on the speculative future worth of the property. When falling housing prices are expected, people tend to sell their property-based investments. Similarly, where the speculation is for rising prices, the people tend to buy and invest in properties result8ing in pressures on the supply and the demand side of the market.

The economic growth in the region can also affect the prices of housing. Economic growth leads to increasing wages which increase the propensity to buy and save for the people in the economy. As a result, they have more money and funds. The desire for better living standards is created resulting in a demand for housing. This then increases the prices of real; estate in the market.

Aside from the above-mentioned factors, the mortgage industry, as well as the location of the housing and real estate, also affects their prices. The mortgage industry tends to increase the price of housing if the mortgages are lent at high rates. Similarly, the location of the house of the property can greatly affect the price of a house as some locations especially those in a clean environment, near schools, parks, recreational facilities fo0r residential properties, and easy transportation access for commercial properties tend to affect the prices of the real estate.

The Supply And Demand of Housing in the UK Industry

As mentioned earlier the housing prices in a free market environment are generally derived from the equilibrium of the supply and demand curves. The interaction between the buyer and the seller results in the variable prices which are offered by the seller and agreed to by the buyer.

Specifically for the UK housing sector, the transaction pertains to the sale of a house is dependent upon the ability and the willingness of the buyer to purchase a property. Aside from this there also exists a price that the seller is willing to take for the property. These two prices have to be adjusted to come at equilibrium to determine the market price for the property.

The housing market is termed a seller’s market when there is a shortage of good or attractive housing properties. In this case, the demand for the property increases in proportion to the supply resulting in additional power siding with the suppliers. This suppliers market then tends to have a higher price as the sellers take advantage of the situation and increase the price of their properties.

The housing and property market is termed a buyers market when demand for both new as well as old houses and properties is very low. In this case, the buyer has the advantage as the supplier is willing to sell his properties at lower rates. The buyers as a result have their choice of the low prices for housing and properties in the market.

The Supply And Demand of Housing in the UK Industry.

The Supply And Demand of Housing in the UK Industry.

The market demand and supply mechanism, as a result, indicates that when the demand for the properties increases in the market, the prices tend to increase as well. The demand can increase due to the migration of people into a region or because of an increase in the population in the region or even due to a fall in unemployment. Similarly, when the supply of houses or properties increases in the market, the prices for the houses and the properties tend to decrease.

In most cases, however, the supply of the houses and the properties in any region is relatively priced inelastic. This is because of the practical situations for property-based transactions; there exist time lags between the changes taking place in the market. Moreover, there is also a considerable time lag for the supply and demand side for the market to respond as it takes people time to shift into as well as to shift out of houses and properties.

The aggregate demand in the housing sector for the UK region is based on multiple factors. These functions lead to the demand function. The growth of real incomes leads to the demand function as the growth incomes trigger desires for better homes and better living standards. Similarly, consumer confidence in the housing sector also helps in securing the future of the market resulting in strong demand. Aside from the rise in employment and the securing of more valued jobs by people in a region leads to a higher demand for property as well. Additionally, the future price movements as well as the housing taxes and government policies of subsidies also affect the demand function.

The government policies which can affect demand include income tax policies, unemployment benefits as well as mortgage facilities, and interest rates provided on government bonds, and the treasury, etc.

How Government Policies Affect the House Prices

The government policies are usually used to regulate or correct the market dynamics of the housing sector to make the market a beneficial one for all parties. The intervention of the government in the housing market can be for taking control of the market failures, increasing the equity and fairness of dissemination in the market as well a to enable the market to be able to operate efficiently.

The role of the government is purely that of a monitoring and regulatory authority; however, it does have a significant influence on the housing sector of any country through taxes, stamp duty, and subsidies. “The Government is an important player in addressing problems with housing supply. Through the Sustainable Communities Plan and current housing and planning bills, it has already embarked on major reforms of the planning system and of social housing” (‘Kate Barker’s Review of Housing Supply: Interim Report Published’, 2003)

The government has the right to pass legislation to regulate the housing market. This legislation takes the form of giving the local authority rights to buy housing and property at discounted prices according to the 19810 Housing Act. The 1983 Housing Act enables the commercial banks to enter the mortgage market for houses and the 1986 Building Societies Act is usually employed to deregulate mortgage finance.

The government can also offer the home buy scheme according to which the authorities on the waiting list a well as the registered social landlords can buy property in the free market. Through a loan provision free of interest for 25 percent of the equity of the house is provided. The rest of the 75 percent is funded by the buyer through mortgage or savings. This results in increasing the ability to buy housing, therefore, increasing demand and priers of the houses.

The government also has an option of housing benefit, which it pays to low incomes households who are unable to afford to buy a house. This payment goes towards facilitating their payment of rent on the housing. The other housing benefits that are provided by the government take the form of providing subsidies to the rented housing sector, which allows the recipient to choose which type of rented housing they want to take up.

The stamp duty is a government tax that is levied on the property at the time of purchase or sale. This is based on the legal transactions of trade for housing or property. For houses bought above the worth of £60,000, the stamp duty becomes mandatory. The government can control the prices in the housing market by increasing the stamp duty on selective range values housing to decrease the demand and therefore the prices of the housing in the region. The government of the UK has been using this policy to regulate housing in the region of London.

MIRAS is Mortgage Interest Relief at Source which was abolished in 2000. This was a method through which mortgage owners were allowed relief from paying taxes. This as a result took the form of a direct subsidy offered by the government to the households seeking to buy a house through mortgage.

The monetary policy of a region has a direct association with the interest rates, which when increased tend to decrease the prices of housing in the region by making borrowing in the market more expensive. Initially, the monetary policy was handled by the government, however now the monetary policy determination has gone into the hands of the Bank of England.

Aside from the above-mentioned policies, the government can also provide direct subsidies to the construction companies to develop and build new houses in the region. This is an effort to increase the supply of houses and regulate the price of housing by bringing it down. Similarly, the government can also provide subsidiaries to the households for improving their houses in terms to make way for better and efficient energy consumption. This subsidy also is focused on reducing the demand for houses in the market and therefore decreasing the housing prices.

The Current Scenario of the UK and US Market

The housing prices in the US are in a slump because of the aggressive lending of mortgages to the sub-prime market. This sub-prime market has been unable to return the money as their income is constrained. This has to lead the lending and mortgaging companies to record and report huge losses and write off the debts of the sub-prime market. The UK market as a result is also being affected by the recession in the US and the state of the housing market in the United States. Over years lending to the sub-prime market in the UK has also increased. The buy to let options in the UK would be the first ones to repossess the properties in the event of a slump in the UK housing sector and the resultant negative equity.

The following diagram depicts the UK Housing Prices over the years.

UK Housing Prices.

“London and the South East led the way during the 1980’s Boom, rising much further than the rest of the country, with the rest of the country continuing to rise as London peaked. Similarly today, the South of England has risen to a much greater extent than the rest of the country, and thus is expected to fall especially hard given the credit crunch in the city of London. The resulting bear market will undoubtly seek to contract the spread between London and the rest of the country by at least 50%. This implies a decline of 30% in the Greater London Area, and an overall UK decline of some 14%. However the decline in real terms when inflation is taken into account will be much greater.” (Walayat, 2007)

The future of the UK housing market is that the market would be declining by at least 15 percent in 2008 and 2009. This is even though the London Olympics of 2012 are coming up. The prices for housing in London are due to decrease by at least 25 percent. The interest rate in the UK as well will be cut by 5 percent in the following years as the rates are currently at a peak and will be coming down shortly.

Why House Prices May Never Fall

As depicted earlier the trend for the UK housing market is that the prices for housing and real estate are perpetually rising. This trend of increasing prices is likely to continue and will not cease. The reasons for this pertain to many characteristics of the UK economy. The demand for houses is increasing and resulting in higher prices as the mortgage companies have come up with longer and more flexible mortgage lending facilities. According to this, the mortgages are being sold for as big as 50 years with a large ratio. Aside from this, the supply constraints that are present in the UK housing market are likely to be present in the future as well. The reason for this is that there is a chronic shortage of housing, in certain areas like London. This creates a pull on the demand and the prices of housing in the region.

With the rising inflation in the economy, the rents are riding in the housing sector as well. This makes it feasible for people to borrow money to buy a house than to rent and pay extra charges without investing in an asset that can be liquidated later. Moreover, the demand for housing is income elastic as it is a luxury. And the increasing incomes of people in the UK are raising the demand for housing in the region as well.

The long-term interest rate in the UK economy is predicted to be low for a long period. This makes it more attractive for people to borrow and build or buy houses, therefore, increasing the demand for housing in the region. Moreover, these interest rates are likely to remain low due to technological advancements, globalization, and competition in the market. Lastly, the increasing number of households in the UK region, especially triggered by an increase in single-member households and changing social trend for divorce and separation is also increasing the demand for houses in the region.

The Effect of Housing Mortgages on the Economy and the Housing Industry

Recently the economy for the United States has started to go into a long-predicted recession. This recession is mainly due to the hyperactivity taking place in the mortgage sector of the economy. The recession has come about mostly because of the haphazard investment of the financial institutions as well as the country on sub-prime mortgages and unreliable customers. The lending in the economy was great however the increase in mortgages and the limited resources of the people have created a global credit crunch.

This is also affecting the UK economy; bringing it down into a recession as well. “The problem with sub prime mortgages is that many homeowners are coming to the end of their ‘introductory period’ In this introductory period, the mortgage interest rate is very low (the incentive to buy the mortgage) However, when the introductory period ends, it means they move to a much higher interest payment. It is feared that up to 500,000 homeowners could be at risk of defaulting leading to home repossession.” (Pettinger, 2008)

In recent events, the rates offered for mortgages have been increased to bring down the demand and therefore the price of housing however, the demand for housing is increasing at a much faster rate leading to perpetually increasing prices of housing and property. The mortgage industry, therefore, has a very prominent effect on the prices of housing and property in the region.

In the future, however, with the imminent recession of the UK as well as of the US economies, the housing prices are due to fall in 2008. This is because of the declining consumer spending. The losses faced by mortgage companies, and the financial losses. “People who face higher mortgage payment will spend less, causing a fall in economic growth. With the economy close to recession, this could be a decisive factor.” (Pettinger, 2008) moreover, “It is not just mortgage companies who will lose out on mortgage defaults, many high street banks have bought ‘sub prime’ debt so they will also be affected. This will lead to a tightening of credit for the average consumer” (Pettinger, 2008). In the end as a result the consumer confidence in the housing market will be affected resulting in a lowering of morale and lowering of housing prices.


The haphazard activity in terms of mortgaging and lending for the housing sector in both the UK and the US markets has affected the future prices of housing. The future prices of the houses in the UK region are expected to come down despite the increase in economic growth in the region in the event of the 2012 London Olympics.


(2003), Kate Barker’s Review of Housing Supply: Interim Report Published, HM Treasury. Web.

(2007), What Factors affect House Prices, Mortgage Guide UK. Web.

Homes in the UK, BBC Special Reports. Web.

Pettinger, T., (2008), Economic Effects of Freezing Sub prime Mortgage Rates. Web.

Pollock, I., (2006), Why is it so expensive to buy a house, BBC News Online. Web.

Walayat, N., (2007), UK Housing Market Crash of 2007 – 2008 and Steps to Protect Your Wealth, Market Oracle. Web.

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