This graph shows two main features of the UK housing market.
- House prices are volatile with frequent booms and busts.
- Despite volatility, and even adjusted for inflation - UK house prices have been on a strong upward trend since the 1930s.
Main factors affecting house prices
- Supply. UK house prices have stayed relatively high (despite recession and credit crunch) because of a shortage of supply. Ireland and Spain have seen much bigger house price falls because they have large excess supply.
- Interest rates. The UK housing market is sensitive to changes in interest rates. Higher interest rates in the early 1990s made mortgages unaffordable and caused a big drop in house prices.
- Economy / unemployment. A recession and rising unemployment usually causes lower demand for buying houses and a fall in price. (falling house prices also tend to deepen the recession)
- Mortgage availability. In the boom years of 2000-07, banks were keen to lend and they relaxed their lending criteria, enabling more people to get a mortgage. But, the credit crunch meant banks had to tighten their lending criteria making mortgages difficult to get (even though interest rates were low)
- see more at: factors affecting housing market
Why are UK house prices so volatile?
UK house prices have been highly volatile in the past few decades. On the one hand this is unexpected. People don't buy and sell houses like a commodity. But, in practise, house prices are volatile for a number of reasons.
- Inelastic supply. It takes time to build houses - with rising demand, supply often can't keep up. This pushes prices up.
- Change in credit conditions. Mortgage availability can vary depending on the state of the banks and financial markets.
- Changing interest rates. Interest rates are used to control inflation, but a rise in interest rates has a big effect on demand and affordability.
- Changes in confidence. In the boom years, we see landlords buying to let and demand rises. When prices fall, people don't want to buy for fear of negative equity.
Why are UK house prices so expensive?
(graph showing nominal house prices)
UK house prices are very expensive. Despite the credit crunch, UK houses are still less affordable in 2013 than at the end of the Lawson boom in the 1980s.
If we look at the affordability of mortgage payments, buying a house looks more affordable because interest rates are much lower in the 2010s, than in the 1990s. But, with house prices nearly 7 times average earnings in London, buying a house is out of the question for many first time buyers. Generally, mortgage companies only lend 3-4 incomes. It is too difficult to raise a deposit. Why are house prices so expensive?
1. Demand rising faster than supply. The UK fails to build enough houses to meet growing demand. This is related to strict planning legislation and the frequent local opposition to building new houses. Home building was also hard hit by the credit crunch. See more at Supply of houses
Housing market crashesIf the UK had a boom in housing builds, we may have had a similar experience to Ireland. In the boom years, Irish house prices rose 300%, but between 2006 and 2012, house prices collapsed, falling more than 50%. The main difference is that Ireland were building record numbers of houses, leaving a glut in the property market. Irish boom and bust. See also boom and bust in US housing market
How does the Housing market affect the rest of the economy?Housing is the biggest form of personal wealth in the UK. Changes in house prices have a significant effect on UK household wealth and confidence. If house prices are rising, homeowners can gain extra cash through re-mortgaging their house and spending the extra equity (this was a feature of the 1980s and 2000s boom). Therefore, rising house prices tend to increase consumer spending. However, if people see falling house prices, they lose capacity to re-mortgage and also consumer confidence tends to fall, leading to lower spending. Falling house prices in 2009 and 1990 were key factors in contributing to the recessions of those periods.
see more at: Housing market and economy
Government intervention in the housing marketIdeally, the government would overcome market failure in the housing market. This would involve:
- Increasing supply to overcome fundamental shortage.
- Protecting green belt land
- Ensuring minimum standards of house building and ensuring tenants get a fair deal
- Seeking to avoid house price volatility.
Related posts on the housing market