The causes of house price changes

What is the housing market?

The UK housing market consists of all the areas of industry and people involved in housing transactions and activities. For example:

• people selling their houses
• people buying houses
• those who rent, including private renters and social renters  
• investors who buy properties to sell them for their investment
• contractors
• those who renovate
• estate agents
• people who assist in buying and selling of property

How is the housing market linked to the economy?

The housing market has a significant link to the economy, accounting for a large amount of the value of GDP, so it impacts what happens in the UK economy. The UK housing market also employs many people in a wide range of industries such as:

• construction
• sales
• furniture
• fittings 

The UK property market is strongly linked to consumer spending. The price of houses and how well houses sell determines what people have left to spend and informs us what the demand is for services and goods in the UK. 

For example, if house prices rise, people with their own homes become wealthier and can spend more as well as become more likely to borrow. They might borrow against the value of their home to purchase other goods and services. When house prices fall, homeowners will spend less and be less likely to be able to borrow.

What are the main causes of house price changes?

The housing market changes and the Bank of England closely monitors it to understand whether the changes produce risks to the financial system and the UK economy. There are a multitude of reasons why house prices change, including:

1. Economic changes

Economic changes can cause house prices to change. When bank lending falls, for example, house prices fall. Also, economic change can affect our level of confidence and expectations of future house prices. This in turn affects whether people want to risk taking out a mortgage. Also, economic changes in the form of tax rises such as stamp duty rises can increase the cost of buying a house, causing less people to buy and house prices to change. 

2. Unemployment rates

Unemployment rates affect house prices. When there is a high level of unemployment fewer people will be in a position to afford to buy a house. When unemployment is high and there is the possibility of economic recession, the demand for housing will fall causing prices to fall too. The effect of a recession on the UK property market is massive and this could also cause house prices to fall. 

It is not only low employment rates which can cause house prices to change but the prospect of unemployment too as people may be too scared to buy a house.

3. Mortgage rates and availability

The housing market in the UK can change as a result of changing mortgage rates and availability. The cost of mortgages is affected by what is happening with interest rates. When interest rates rise, mortgage interest rates will likely rise too meaning it becomes more difficult to get a mortgage. This in turn means there is less demand for purchasing houses. As a result, house prices will drop. In addition, when interest rates are high, people are more likely to turn to renting rather than purchasing a house.

4. Supply and demand in the property market

Supply and demand in the property market are one of the main causes of house price changes in the UK.

The supply of housing means the number of properties available for specific prices during a specific period. When supply is short, house prices increase, and where supply is in excess, house prices will fall. Demand in the property market is often determined by whether banks or mortgage lenders are willing to lend to consumers to purchase a house. When there is demand, house prices should rise.

Supply and demand can be affected by related demographic factors such as:

• market size
• how many people are getting married 
• the number of couples getting divorced
• the number of people dying.
• costs of production to build houses
• technology 
• government policy and spending

Other factors also affect the supply and demand of the property market such as:

• income
• credit availability
• cost of mortgages
• interest rates
• what consumers prefer

5. Public affordability

Naturally, when the public can afford more there is a higher demand for purchasing houses and house prices will rise. Public affordability can depend on an increase or decrease in peoples' real income, as this affects the standard of living. If people can afford to buy houses, the demand for houses will increase which will cause a rise in the price of houses. 

6. Other factors (geography, demographic etc)

There are of course other factors which affect house price changes and politics is one of these. This is through, for example:

• banking regulation
• town planning
• government investment

Also, factors such as net migration and lack of demand can make house prices change, as can a fall in market rentals which will discourage investors from buying to let. Households can change too, when the average size may rise and this can affect house price changes. Also, some areas are more desirable than others where, for example, there are good schools or travel links nearby, causing house prices to rise.

Thinking of buying or selling a house?

Are you thinking about selling your house or buying a house? Perhaps house prices are in the right place for you right now. If you do want to buy a house or sell your house you will need the essential assistance of a conveyancing solicitor. We at Homeward Legal can help you with your conveyancing needs to ensure the process is swift, efficient and cost-effective. 

Contact Homeward Legal today on or by dropping us a line here.