The housing market


The housing market is important as it has the strong impact on financial system, which affects the capital availability, which finally affects the real estate markets. Experts say that a booming housing market gives people confidence and encourages spending. If value of houses keep on increasing the house owners are more likely to spend. People will also need more consumers durable if they are moving or buying homes, eg. Washing machines, wardrobes, carpets, etc. So, this clearly gives idea why housing market is important for the country. (why the national housing market is so important- )

This study mainly focuses on U.K. housing market. I am going through the important factors that had an impact on housing prices, the reason why house prices fall. Sometimes, even in this period of falling price or low price the demand for house is too low. Reasons for this decline in demand are also included in this study. It also includes the house prices in last 2 years and also future expectations about housing market.


Demand is defined as the quantity of a good or service that customers are willing and able to purchase during a specified period under a given set of economic conditions.

Law of demand:

"Other conditions remaining same, as the price of a product increases, the demand for that particular product decreases."

Factors affecting demand of a product:

  1. Price of a product: as the price of the product increases, the demand for that product decreases. It means there is a inverse relationship between price of a product and quantity demanded.
  2. Price of other products: As the price of the substitute goes up, the demand for the main product goes down. And as there is an increase in price of compliment product, there will be decrease in the demand of the main product.
  3. Income of people: If the income of the people increases, they are willing to buy a normal product or good product, so demand for that product increase, but the demand for the inferior p[product decreases.
  4. Population of the area: As more or fewer consumer the market, the demand for the product goes up.
  5. Preferences: There are so many kinds of things that can change one's tastes or preferences. So if the conditions are in favor of the product, the demand of the product will increase.
  6. Future price expectations: If people come to know that the price of the product will go up tomorrow, they will buy the product today. It means the demand will increase, as the future price seems higher than today.


"Supply is the quantity of a product that a producer is willing and able to supply in the market at a given price in a given time period."

Law of supply:

"Other conditions remaining equal, as the price of goods or service increases, the quantity of goods or services provided by the supplier increases and vice versa."

Factors affecting supply:

  1. Price of the product:
  2. The price of other products:
  3. Prices of factor of production used to produce the products:
  4. Technology
  5. Number of producers:
  6. Future price expectations:


"In the free market house prices are determined by supply and demand. With an increase in demand prices will rise. With a fall in demand prices will fall. Demand and supply conditions can be very different between regions, causing major differences in house prices. Also over time conditions can change (e.g. in a boom demand is likely to rise) and this leads to fluctuations .Because houses are the major item of expenditure for most people in their lives and their main assets such changes are very significant in terms of their impact of their income and wealth."

Haris Beider discusses about changing demand in housing. He mentions about a number of micro-level (neighbourhood) and macro-level (regional and national) impacts that have an influence on whether an area will experience low or changing demand.


Demand side factors:

  1. Interest rate:
  2. The cost of paying for a mortgage is mostly affected by interest rates.. It is very important as mortgage payment is generally the biggest part of a landlord's monthly spending. In UK, the most of the landlords have a variable mortgage which means there will be rise in cost of mortgage if the interest rates go up. (

    Bank of England set the base for the whole economy in the UK. Increase in interest rates will cause a rise in cost of mortgage repayments and this may force people to sell and discourages buying. In 1992, there was a fall in demand for housing and finally house price fell as the interest rates were over 12%. Goeff Riley mentions about the impact rising interest rates on demand for housing. He states that it causes a fall in demand. (Geoff Riley , Housing Market Economics 2005, Published by Tutor2u ltd)

  3. Market sentiment/ expectation:
  4. This is something related with human psychology. If people observe that the house prices are rising, they expect a further rise in the prices and will be tempted to buy a house. When this is a case, the confidence in the market is high and mortgages will be available with small deposits. From 2001-2007, 100% mortgages were quite common. Housing market was at a boom. But now, there is a different case. House prices are falling on a daily basis and confidence in the market is very low. But now, banks are not lending mortgages without a big deposit. ( Peter Williams and Hoffman has mentioned about market expectation. He states that "optimistic price expectation may result in rising prices and rising demand"

    (Peter Williams & AE Holmans, Directions in Housing Policy: Towards Sustainable Housing Policies for the UK 1997)

  5. Economic growth/ unemployment:
  6. If the income of the population increases, they spend more money on buying a house. Traditionally, there is a ratio of mortgage 3 times of the salary of people. Therefore, rising income enable house prices go up. However, the ratio of house prices to income can vary considerably. If the income goes into a recession and unemployment rises. The demand for buying houses would fall significantly. (

  7. Mortgage availability:
  8. The period of 2003-2007 saw a housing boom and the banks gave 100% mortgages and self certification mortgages. Thus, there was a increase in people who was able to buy. Johnston Birchall discusses the change in house prices and mortgages advance ratio. He told that the increase in proportion of mortgage rises as a result of higher house prices. (Johnston Birchall, Housing Policy in the 1990's 1992)

    Credit crunch is also the factor that is having effect on housing market, which refers to a sudden shortage of funds for lending, which results in a decline in loans available. Credit crunch can occur for many reasons:

    • Direct money control by the government leads to credit crunch.
    • If there is sudden rise in interest rate, it will affect the loans available.
    • If there is a drying up of funds in capital market, then also there is a chance of credit crunch.

    In UK, mortgage lenders did not lend so many wrong mortgages. Even though mortgage lending became more flexible in last few years; it still had good control in place than in the US. However, it caused very serious problems in Northern Rock, which had high percentage of risky loans, but also had the highest percentage of loans financed by capital markets.

  9. Government policies:
  10. Government policies have an impact on house price. It can take various steps to control the prices of houses in a free market. They can take several steps to moderate house prices they could build more houses, can increase interest rates, increase the stamp duty etc. Governments can change some policies and that certainly will have an effect on house prices. The steps taken by UK government in the recent time can be taken as an example.

    Example: Reduction in VAT and encouraging people to spend.

    Example: The government is pressurizing the banks to cut the interest rates.

    Example: Bailing out of banks and encouraging them to lend

  11. Consumer confidence:
  12. During high consumer confidence, people are more desired to take out risky mortgages to be able to buy a house. For example, in the period of 2001 to 2008 the mortgage is easily available and it was very common. In recent years, people very optimistic about housing market. But earlier, people took out mortgages with a higher debt to income ratio. ( )

  13. Demographic factors:
  14. In recent years, the number of householder are increasing rapidly in UK. If the average family size decline and there are more people who live alone, then there may condition in which the number of landlords grow quicker than the population.

    Demand for the houses in UK goes up because of following reasons:

    • Children leaving home early
    • Less marriage
    • Divorce rate is increasing
    • A lot of people coming to UK for earning money, specially students
    • Increase in life-span and more old people are living alone
  15. Speculation:

Everybody does not buy home for living. Here, the number of property investors buys houses to try and make both capital and income from renting. They are used to buy housed when prices are increasing and sell when the market appears to turn. However, there are high fixed cost in selling a house, such as stamp duty and estate agent fees. It is not like the shares that people can buy and sell whenever they want.

Supply side factors:

In short run, following factors affects the supply of houses:

  • In short run, supply of houses in any market is fixed, as it takes a long time to build houses. So, demand affects price more than supply in short run.
  • However, a rise in demand will lead to a big rise in price, if the supply of housing is inelastic.
  • In long run, following factors affects the supply of houses:

  • In most of the areas in UK, it is too difficult to obtain planning permission.
  • It is difficult for the builders to get their returns back from the consumers.
  • If the cost of building new houses goes up, the supply goes down.
  • In UK, there is a significant shortage of housing, which explains why house price have risen much faster than earnings. In 1992, house price in London fell over 20%, even though we can say supply is inelastic. ( )


The UK housing market is expected to decline by at least 15% during next 3 years. Despite of the Olympic 2012, London is expected to fall as much as 25%. UK interest rates are near to peak, as there was a chance of further rise in October 2007.After that, interest rates must be cut because housing market declines targeting a rate of 5% during 2008.

UK House prices expected to decline in 2010:

Nationwide building society made a latest forecast about housing prices in UK in 2010 that the UK housing market should prepare for another rise in prices of houses next year. Bloomberg published the results which were made by survey, according to Peter Woodifield, house prices will go down by another 10% in 2010 and will return to its original level as they had in 2007, only in 2014. This forecast made by them includes estate agents and economists of the United Kingdom.

Majority of the economists told that the UK housing market will need around 5 years to recover. While another group of economists experts said that the recovery of UK housing market should only be expected in 2019. They said that the house prices will be at their critical levels only if they go down by another 20-25%. The recent fluctuation in house prices is caused by differences between demand and supply in housing market.

Past UK housing market analysis and forecast trends:

UK mortgage supply crash:

The low interest rate cut directly to 2% from 5% in last 3 months and the £ 600 billion bank package were at unfreezing the UK banking system so as to enable the banks to resume normal operations and support the housing market of UK. The recent data from BBA (British Bankers Association) shows a sharp fall in the number of mortgage approved for housing to 17,773 against 64,014 in 2007. The net effect of this is that total amount of loans decreased by £ 35 billion, against a stable mortgage market which might have required the rise of minimum £ 25 billion over the same period. During the same time, when supply has fallen so it has the average value of loan offered for purchases which raised up to £ 159,6000 in 2007. And now it averages at just £ 116,700.

UK inflation / deflation:

The economists concluded that UK is heading for original deflation during 2009. The RPI inflation measure is expected to go negative and spike lower around July 2009 as the RPI is affected but mortgage interest rates. The CPI will also continue to fall sharply in July 2010, which is targeting a rate of just below 1%. This supports the view of a much weaker housing market during the 2nd half of 2010 rather than 1st half. ( )

UK house price depression forecast 2010 to 2012:

House prices in the UK will fall by 6.7 % next year, according to estate agency, most recent forecast. The house prices in the mainstream market have risen by 3.7% this year. But, the economists believe that this is a temporary phenomenon and the market will soften in 2011 as the economy is weak. The economy is bottomed out in case of gloom, but the economists are still looking at low levels of the growth so next year is also going to pass in a recession. The recent research team has told that the house price will go up to 2.7% in 2011 and will go up to 27% between 2012 and 2015. The centre for economics and business research is forecasting that house prices will go down by 40% from their peak in 2007. Halifax has declared that average house price is £ 159,900, compared to high of over £ 200,000. It is also expected by the economics that the house prices will be the same in 2013 as they were in 2003.

The reasons why house prices are falling:

The analysis of above factors and demand and supply and the house prices in past and present, tells that the following are the reasons why house prices are falling in UK:

  1. lack of mortgage finance
  2. The ratio of house prices to income has risen to an all the time
  3. For first time buyers, house prices are unaffordable
  4. House prices can fall-even with limited supply
  5. Speculation in UK housing market
  6. Herding effect of UK housing market
  7. Volatility of UK housing market
  8. UK sensitive to any change in interest rates
  9. Predictions for house prices UK
  10. Subprime mortgage collapse
  11. Northern rock and effect on consumer confidence


From the above study it is clear that UK housing market is declining. It was at its boom before 2 - 3 years and now it has taken a turn from the peak. The forecasts and predictions by experts clearly show that the house price will continue to fall. In normal circumstance if the price of a commodity falls the demand is expected to rise. But that common theory is not happening here. Overall economy of the country and world by the affect of global credit crunch can be one of the reasons for it. As prices are falling the confidence level of people to buy new house is also low. Unavailability of the mortgage can be another reason for this. At present people are losing jobs and country is facing a high unemployment rate. When unemployment rate is high in a country it is quite obvious that the purchasing power of the people will be low. A rising unemployment can be another factor for house price decline.

We have also seen extensive measures taken by the government to control the housing market. Cut in interest rates and government pressure over banks to lend mortgages are important steps taken by the government. Despite all the steps from the government the prices of house is still going low. Government is also striving hard to create jobs. Optimist see a increase in price and demand in long run. 2012 Olympics and boom country can have in that period give strength to this prediction.


  1. Why house prices are falling in UK-
  2. Why the national housing market is so important-
  3. Factors affecting demand-
  4. UK housing market crash and depression forecast 2007 to 2012-
  5. House prices UK-
  6. Halifax forecasts flat UK housing market in 2010-
  7. UK house prices expected to decline in 2010- house-prices-forecast-for-2010-3985.html
  8. More house prices falls next year-
  9. Managerial economics by Mark Hirschey
  10. Andrew Gillespie , Advanced Economics Through Diagrams 2001
  11. Harris Beider , Neighborhood Renewals & Housing Markets 2007
  12. Geoff Riley , Housing Market Economics 2005, Published by Tutor2u ltd
  13. Peter Williams & AE Holmans, Directions in Housing Policy: Towards Sustainable Housing Policies for the UK 1997
  14. Johnston Birchall, Housing Policy in the 1990's 1992


  1. Managerial economics by Mark Hirschey
  2. Andrew Gillespie , Advanced Economics Through Diagrams 2001
  3. Harris Beider , Neighborhood Renewals & Housing Markets 2007
  4. Geoff Riley , Housing Market Economics 2005, Published by Tutor2u ltd
  5. Peter Williams & AE Holmans, Directions in Housing Policy: Towards Sustainable Housing Policies for the UK 1997
  6. Johnston Birchall, Housing Policy in the 1990's

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