Factors that determine house prices in free market

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"Houses prices increase in UK" is probably one of the most important issue of discussion because it correlates the every individual life either its social or financial life, and people are most concerned bout what's going with economy ?

what is Government doing for their betterment?

How cope the Government cope world credit crunch?

Why Government seem helpless to control the prices of houses ?

And when credit crunch will be over?

It means that a common person wants to get rid of all the problems which they are facing in their lives and want to solve their financial matter , now we look another aspect of people perceptions which is very related to the topic.

Every person has unlimited wants , needs and wants to fulfill all those. But the problem arises when they have made bound in their decisions because of limited of resources, so that's why they cant cope and couldn't get the balance in life and same happened in country's economy .

And the problem which is facing by the people , facing the Government also because limited resources and unlimited wants of people , how can the Govt cope. But thanks to economist that gave the solutions and said that

"when we use our resources efficiently and get optimal use from the resources that is call ed economics "

There is the problem with the prices of houses , we see since mid 1990s this is the time period when the prices of houses start rising and the home owner got abnormal profit and common people have to leave the dream of its own home.

Determinant of price in an economy and supply side factors

There are key factors , which determine the price of houses , or specially those factor which are heavily influence the rise in price of house in UK.

In every economy the basic determinant of price is "supply & Demand " means that when there is surplus supply of any commodity in the market , then price of that particular commodity will fall and when the price of that commodity will fall , the prices of that thing will fall and when the price will go down , demand of that commodity will triggered out , then demand curve shift right word and price will go up word , and as price will go up after some time people will leave to buy that commodity and demand curve will shift back word and then there will be equilibrium in the market and market will function efficiently .




So it all happened with the "price of house in UK"

But specially in commodity sense when we look number of house , we cant change , increase the supply of houses in the short term , because it is very difficult to (scarce of resources , land , capital ) .

So in short term supply curve would be the same but in long run we can change the supply of houses..and that's why in above diagram supply curve is not changing with the price up and go down .

We can change the supply of house in the long run because:

we can have time to better planning, but it is very difficult in rural area but effective in suburban areas

opportunity cost for builders.

We can rebuilt existing houses which are not fit for living

If Government rise the cost of new houses supply shift right word.

In UK because it is very difficult to increase the supply so Government could not remove the shortage from the economy, so that's why prices of houses are increasing more frequently than the change in inflation and earning of people.

But if we look the USA market of house, there is different scenario about supply of houses up to 2008. the supply of house increased , but the situation reverse. It generates the surplus supply and then falls demand led to a big fall in demand.

How it is very important to note that even shortage in the market price could be fall in 1992 house price in London decrease up to 20%, even we can say that supply curve is inelastic

Inelastic supply means that , it is a market behaviour against any commodity which explains that any increase in price or decrease in price of commodity does not any affect on supply of that commodity , it means that it remains same and constant.

Demand side factors which effect the prices of houses

Demand means that "desire of certain commodity (goods or services) which is supported by the purchasing power"

There are number of factors which fluctuate the prices of houses in UK and we analyze that why housing market inclined to period of Boom and Bust, the London housing market has a long period of rise in price however we are analyzing some turn in the price now.

Key factors

economic growth

Interest Rate

Consumer confidence or expectation

Demographic factor


The rented accommodation

Inherited wealth

Now we further discuss and elaborate the topic

Economic Growth

Economic growth means that a country's economy is growing in the sense of its productivity increase, its GNP increased, its GDP increased as compared to its previous year data . it also refer to increase in its capital stock and also it included "sustainable development".

When an economy has this feature it means that people has rised in their income so they are able to spend more purchasing on house, basically we see that what is the mortgage rate , it is 3 times of your income or salary .

It means that if you are earning 30000 pound , the Building society would lend it 90000 pounds , so that's why when people have earning more and continuos economic growth in the economy , will surly price of houses rise because people more demandable for house and that's why prices will shook. If the economy suffer recession period then above case will be reverse and price will be fall .

Interest Rate

Interest rate is very important determinant to price because most house holds in London buy a variable mortagae . it means that when Interest rate changes it would heavily affect upon their spending or decreased its spending. In recent years , historically lo the interst which due to increase in demand from people and when people want more house demand then again the price of houses will increase.

There is alternative approach , that is to use of base interest , and when the base rate increased , then people find to difficulty to repay their amount of mortgage which leads to decrease in demand.

This situation was happened in 1992 , when interest rate was increase up to 15 % , means that decreased in demand 15% and also it leads to fall in prices of houses up to 15 %.

Consumer expectation or consumer confidence

Consumer expectation is in an important factor to increase in demand of houses and that's why people are willing to take high risky mortgages which were very common in early 00s , in that time people have mortgage up to 6 times of their level of income which leads to increase in prices

However during in 2008 when credit crunch strikes the money market then shortage arese in the finance then the scene reversed.

Demographic Factor

Demographic factor basically are the statistically analysis about the population of any country and it includes the study about their sex, age , marital status , religion , birth rate, and death rate also.

Which has impact on the house of price , because the number of rising in people also increased the demand of house.

It would be more demand if there are more single people live alone

The demand for house could be more if divorce rate increased.

Increase in the number of immigrants from Europe

Increase in life expectation and living standards

Children's leave their parents early

Less marriages


There are many people who buy house not for live in it , basically these are investors who anticipates the change in prices advance and wanted to get capital gain and income from renting the house also. Those investors buy a house when prices are rising and sell when the market seems to be turn

Although the prices of houses in UK have been incrasing more rapidly than inflation , but renting is also increased , due to high rented accommodation because people want to a house.

Inherited wealth

There are so many people who born with silver spoons , means that the people have inherited too much rich , that they can buy any house , for any cost and also they help to their children's to have their first house means that it leads to houses prices up because people have ways to have house


Low unemployment is also a factor to increase the demand of houses because people are earning money from there jobs so they all want to have their own homes and employment make them capable that he fulfill their demands so that also a cause to increase the prices of houses.

How can Government influence to control the Prices of Houses in UK

Government has two tools to minimize the inflation (continuous positive change in prices of commodity for a long time period called inflation)

Fiscal Policy

Monetary Policy

Fiscal policy

Fiscal policy related to Government spending and revenues Govt revenues included ( tax collections ) . it is used to control economic cycle in order to achieve lower unemployment or achieve to no inflation in economy or less inflation.

Monetary policy

Monetary policy , as term shows that it is all about money , so Bank of England imposes tight monetary policy or easy monetary policy to control the economy of the scale.

If the central bank wants to control the flow of money in the market, Bank of England impose the tight monetary policy if Bank wants to circulation of money in the market then impose easy monetary policy .

To control the prices of houses central bank introduce the monetary policy , it means that when Bank of England tries to charge the official interest rate , it is attempting ti influence the overall expenditures of the economy , because when central bank low the interest rate on savings then people would draw all their saving from the bank because it is not attractive for them and then spending power will increase , when spending increases, level of out put automatically trigger out and then result is increase of inflation, when inflation is increased it means that prices of houses also increased.

So this way Government changes in the economy and can control the inflation …

"The opposite occur when interest rate increased"

changes in interest rate can also be affect the exchange rate , an un expected return would encourage the overseas investors to invest in the United Kingdom assets , and make money to their foreign exchange rate in its native country . it also reduced the exports of the UK which is not favorable ….

But there is good thing which is , when foreign investor invest in local economy , then production increased, and when production increased then demand increased , and when demand increased then it produces the opportunities of jobs, and when people have jobs then they gone a earn money which raised their purchasing power , and when spending increase inflation could be trigger out and level of employment will be increased.

We can not say that Govt control any thing which is happening in the economy in one day because all channels have take their own time to complete, like the out put take almost take one year to give the desired result and rates in consumer prices takes two years

So "interest rate should be apply on right judgments "and what type of inflation is prevailing in the market ..

In a nutshell

Setting Interest rate rightly

Central bank, work as a bank of Govt and the banks also , because Bank of England is able to forecast and have insight of an economy accurately.

Because Bank Of England exactly know about the transaction which are taking places in between Govt accounts and commercial Banks.

Central bank oversees the activity of Govt and also the performance of commercial banks, and try out to balance cash flows between Govt and commercial banks.

The Bank Of England supplies the cash to commercial bank to work smoothly , because central bank has monopoly to circulation of money and printing of notes.

And when the central bank provides funds to the commercial bank at a certain interst rate it is quickly pass on to all the financial instiutions and mortage houses .when Bank Of England charges their base rate , from which deposits and lending are charged.

Now we closed topic of discussion with the news which I heard BBC(British Broad costing ) , news about credit crunch and I think credit crunch is also a big hurdle to price efficiency of houses.

There was flashing news on BBC and it raised a very fruit full question by SUSANA MENDONCA


the answer was , Maybe not it was question of JOHN MAJOR that

"May be not , but if Government ignores or fail to deal which the consequences of serious problems in the housing market "

because there are also other factors which we have been discussed above ..