Friday, September 7, 2007

What Determines House Prices?

What supply and demand factors affect the price of houses and do schools with a decent reputation have any affect on the prices? Thanks! Nikhil

House prices are determined by a combination of supply and demand.

In the short term supply is fixed. Therefore, it is demand that has the most effect on short term fluctuations.

However, the long term rise in UK house prices is closely related to the fundamental shortage of supply.

The most important demand side factors are:

  1. Real Interest Rates - Higher interest rates make the cost of mortgage payments more expensive therefore reduce demand for buying a house
  2. Population - Growth in immigration has been a significant factor in increasing demand for houses, especially in the South East of England
  3. Incomes - Rising income enables more people to spend on housing. However, house prices in the UK have been rising at a much faster rate than income, suggesting other factors are important
  4. Confidence. - In the past 10 years people have had confidence in the future of the UK Housing market and so have continued to buy. However, in the US, people's confidence in the market has changed drastically. This has caused US house prices to fall.
  5. Availability of Mortgages - To get on the property ladder, an increasing number of people have been getting unconventional mortgages. This makes it easier to borrow large amounts. Therefore, the high prices are sustained.
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