Factors that determine housing prices in free market

A Free Market means the market where government has no interference or control over the cost of the product, where cost decides by the supply and demand of the particular product or services. Basically in free market customer are the kings as they are free to buy anything what they like which increases or decreases the demand of that particular product or services and once the demand is high the cost will go up for the same product. {Demand which refers to how much (quantity) of a product or service are in want of the buyers where supply stand for how much (price) the market can offer.}

Ex- USA, UK, Japan

UK Housing market

After being familiar with the role of supply and demand for the particular goods or services in a free economy, I would introduce with the housing market of the UK.

As UK housing market is really broad in sizes and it’d being booming on past couple of year before recession came into the picture which caused housing market to be slower down.

UK housing market did remarkable recovery after disastrous crash has happen in past around 1990. The report of HBOS sows that currently on an average the price of the houses is approximately £165,000 which is almost double of the price comparatively £85,000 (before).

The Given image shows the growth of the housing market in particular region of the UK.

As you can see on the given figure that there is good deal of cyclicle behaviour in each series with increasing starling since 1999.

In fact, Recent reccession came which affect housing market very seriously and slowed it down recordably for the first time.

HOUSING MARKET OF THE UK

Many factors affect the price of houses. Some of these are briefly explained below:

Supply and demand – a crucial factor that enables a price to be produced from the amount of housing there is and the demand for them.

Elasticity – with more/less supply/demand of a property, prices could dramatically change according to the elasticity of the house.

Interest/Mortgage rates – These affect all things on the market today and with a high interest/mortgage rate, there will be less demand for purchasing a house.

Consumer confidence – with house prices booming, the expectation for people is that they will continue to rise, boosting consumer confidence. This will put more demand for houses and more profit for the sellers. However if their confidence deteriorates, then less houses will be bought.

Employment – A job can sustain someone for a long time, especially when considering buying a house. An increasing number of people have jobs and more demand a house, effectively driving up prices.

Income – people with a higher income are more able to buy a house compared to someone on a low income. Therefore more (expensive) houses are demanded more by those who want a better standard of living.

Availability of Substitutes – Hotels, apartments-to-let and caravans.

Location – The closer the house is to a main town or city; the higher the price. This factor coincides with many other minor factors all associated to location.

Property quality – The more assets the house contains; the more it will cost. More crime rate will lower the price of the house. The size will also affect the price and demand. Some people do not want or can’t afford such expensive houses so they choose other sizes such as detached to flats according to their tastes.

Supply and demand:

The diagram is given above is explaining the equilibrium point of the market stand as ‘P1’. The amount of demand or supply is in the market produces the price of the house. If we see any changes in supply of the houses or when it goes up which causes price to go up too because the demand of the houses is more (Q1-Q3), meaning that the supply of housing is limited.

Once supply rose with an increased price buyer would limit their pocket and post pond the desire of buying a house which will decrease the demand of the housing market so contraction on demand curve will occur. Since increased supply and lower demand would force seller to decrease the price and sell the properties at lower rate in the market place as the demand is too low, with excess supply of the houses (Q2-Q3)

As we can see on the image above which shows shifting of demand curve caused by several other factors, and once demand is high further cause’s price of the housing market to be up also. If we talk about elasticity, yes demand curve is elastic as there are many substitutes available in the market which people can easily go for, if prices are too high. So If prices of the houses goes up leads to decrease in the quantity demanded by the costumers.

Even there are so many other factors that affect demand curve to be shifted

If the expectation of the people concerning price to be rise which attract people to invest more cause shifting of the demand curve to right side shows increase in demand.

The other main factor is Rise in real incomes, if the real income rises which produce more disposable income therefore increase in purchasing power of the people would cause demand curve to be shifted to right side in result of demand is more.

Decrease in Interest rates/mortgage rate would raise the demand of the houses.

Population of country – Shifting of demand curve is depends on the population of the country. The more populated country is the more demand of the housing will be.

And at least but not the last the rise in price of substitute like renting a house, council taxes etc causes the change in mind of consumer to buy an alternative which is house. As buying a house would be cheaper than to be in rental house.

These are the factor which will force prices to go up. However if the prices will go down (the opposite situation) suppose decrease in earning which will leads to decrease the disposable income of the people and once the disposable income fall down of course purchasing power would fall down also causing shifting of demand(demand 2) curve to the downwards.

As because of very limited amount of land and it takes time to alter the price of the houses (Rise/Fall) and constructing the building takes time or even frequency of home owners decides to put their home or properties on sale is long which makes supply curve relatively inelastic.

There is two side which determine the prices of the houses in the UK

A Sellers Side;

Seller side means the situation where the good quality properties are not available as per the demand or we can say on the shortage of the good qualities properties occur and the demand is high then the balance of the power on that particular market shifts to the seller side. And by taking an advantages of the situation seller increases the prices of the houses or seller can wait for the offer of the same price as much as seller wish it to be sold.

The Buyer side;

This is situation where demand for the properties is weak/low and there is excess of properties are available in the market, then the balance of the power shifted to the buyer side. As they will get more n more option of choice to buy or invest in housing properties which is available in the market and then once buyer would have more option of course they negotiate the price of the houses down before they buy it.

The second situation says that when because of inflows of the people in the particular area, or rising income, or increasing employment rate of the country would result in increase in demand for the houses as they invest their disposable income into properties by buying a house.

Often the housing market is inelastic as because of the time gapping in between the making new properties available (increase in supply) or increase in the price of the properties or rather homeowner decide to buy their house to be sold on the market which makes housing market inelastic.

And if demand is increasing and supply is being inelastic the result would be, rise in prices of the houses in market and a relatively the amount of the houses will be traded which is very small growth for the industries. So supply becomes more elastic over time, assuming the condition of the demand remain unchanged, we expect to see downward pressure on prices and a further increase in the equilibrium quantity of houses bought and sold.

Factors that affect the Demand of Housing market in the UK.

Change in Market demand and supply is very sensitive for the market of owner-occupied housing. There are several factors which often explain inequalities in housing price inflation between and within the major areas of United Kingdom.

These are the several factors given below which shows the demand condition for housing which influence both the readiness and the ability of the people to make house purchase.

Some of the most important conditions of aggregate demand are listed below,

Rise in real income of the house hold – owner occupied houses is like normal good for the people of any country and rise in the income of the house hold would increase the market of housing. As house hold disposable income increases of course they would invest in housing market rather investing in anywhere else which causes’ shifting of demand curve in result of market goes up.

Confidence of the consumers – When we talk about housing, we shouldn’t forget about confidence of the consumer which play a major role on customer mood where to purchase a house or not. And how confidence comes, it depends on future expectation of the people so rising expectation of the people regarding performance of the economy whether rising/declining would have an significant effect on the housing market.

Ex. – Let’s say People expectation of the UK have kind of negative expectation about UKs future economy, So on that situation people wouldn’t want to invest money on any long term investment rather they will look for either short term or they will save it.

On other hand, if expectation of the people regarding performance of the economy in future is good then people would cut their saving and invest in long term housing investment or buying a house.

As we can see above the two opposite condition shows that how confidant of the people have an enormous effect on the housing market of the country. If the confidence is good it would cause demand curve to be shifted to the right side it means housing market is expanding. And if confidant is not good then Demand curve should sift to the left side which means housing market declines.

Employment – As in any country if ratio of the employment is high it forces people to think to invest in long term investment through an mortgage lender would increase housing market whereas if employment rate is low like poor countries such as Africa or if any country going under recessionary period causing loss of the job which declines employment ratio. in this situation no people of the country would invest in housing market causes shifting of demand curve to the left side because financing a house purchase involves making a long-term commitment through a mortgage lender.

Above mentioned three Points which is Income, Employment and Confidant are the main determinant that directs the price of the houses in any particular market place. Housing market goes up only when these three factors rise and when these three factors are showing grows down that means housing market is declining. However other economic variables also come into play.

Pricing movement expectation – If you see housing as a long term investment or consumer durable that gives a flow of services to the owner of the properties over a long periods of time by expecting that the prices would go up in future? It does not matter how you see all the way it would be beneficiary from both the view to the owner of the properties. That’s the reason why housing market was booming in 1980s because of strong speculative demand of the houses/properties.

Further explaining if people are seeing that demand of the houses would be higher in future which force them to acquire a house by buying them and save it to next 3-5 year to sell it. Which affect housing market to go up or down means demand curve would be shifted either right or left side.

Changes in Government policies about housing taxes and subsidies – Change in Government policies which affect the housing sector enormously in different ways start from benefits for council taxpayers on low incomes to the payment of stamp duty on the most expensive properties.

As Government changes with an advantage of tax reduction and lowering stamps duties would encourage Buyer of the properties to buy a house or invest into it. Or in other hand, if government increases the tax and stamps duties instead, it would make housing demand to go down which means demand curve should move to the left side showing declined in the market.

Throughout most of the 1980s and 1990s the government offered home buyers an explicit subsidy in the shape of mortgage interest relief at source or MIRAS. Chancellor Brown decided to phase this subsidy out of the system – MIRAS has now disappeared. The effect has been to dampen down housing demand, but do little substantial to stop house prices rising.

Accept these are the main factor which mentioned above there are some other factor also which help housing market’ demand to go up and down and those are as mentioned below;

Semi-detached and Detached properties.

Is Properties is new or Second hand?

How many bedrooms are there on the house?

Home improvement.

The Location of the houses. (Is the property is situated in central London or 3rd zone somewhere?)

http://www.zoopla.co.uk/for-sale/property/london/?q=central%20london

How government policy affects the housing industries

Change in Government policies which affect the housing sector enormously in different ways start from benefits for council taxpayers on low incomes to the payment of stamp duty on the most expensive properties.

As Government changes with an advantage of tax reduction and lowering stamps duties would encourage Buyer of the properties to buy a house or invest into it. Or in other hand, if government increases the tax and stamps duties instead, it would make housing demand to go down which means demand curve should move to the left side showing declined in the market.

Throughout most of the 1980s and 1990s the government offered home buyers an explicit subsidy in the shape of mortgage interest relief at source or MIRAS. Chancellor Brown decided to phase this subsidy out of the system – MIRAS has now disappeared. The effect has been to dampen down housing demand, but do little substantial to stop house prices rising.

Conclusion;

As we have seen that how housing market goes up and down, which are the factor which determines the prices of the houses and what are the causes which forces demand or supply curve to be shifted either on right or left side and we have focused on government policy that how does it affect on the housing market of the UK. And it seems according to showing graph on the pages above that housing prices would still go up in the market, where government policy definitely will play a major roll on it, the fiscal policy, the monetary policy, tax, subsidies plan and inflation brings by the government decides to go up or bringing down the housing market of the UK.