ECONOMICS Investigating the housIng market

The reasons for house price inflation in the UK

Primarily, the reason for rising house prices in the UK is down to a combination of both increasing demand and scarce supply.

The increase in population growth and increase in wages across the country means that there are more and more people in the UK demanding a house as they earn more money. As a result, the demand curve for the housing market has shifted right causing prices to rise to a new equilibrium level. However, with supply not being able to match demand quickly due to factors such as the shortage of land available and the length of the production process for building a house taking effect, it has meant that there is excess demand in the market for houses as the market takes longer to find the equilibrium price where demand equals supply.

Both the demand and supply for houses are price inelastic (consumers are likely to react to price changes due to the large percentage of their income purchasing a house takes up and suppliers are not able to build houses straight away to sell to the market), proving why the changes in demand are having such a drastic effect on the price rise.

Consequently, it means that houses are becoming more and more scarce and therefore, more expensive.

The housing market and the rental market: how are they linked?

As the price of housing increases, the demand for rental properties also increases.

Consumers have two options: buying a house or renting a house. With this is mind, it means that if the price of buying a house becomes unaffordable for consumers, they are likely to opt for renting instead as a cheaper substitute service. Therefore, the housing and rental markets have a positive XED as as the price of one rises, the demand for the other rises too.

However, there is a problem with this. Another main reason for the scarce supply of housing in the UK is due to the fact that they are an investment good for property buyers. Unlike some goods, the value of houses increases after the consumer has bought it and as a result, there are consumers in the market buying more houses than economic theory says they need in order to make profit from renting.

Therefore, if house prices are inflating because people are owning more houses, then the people who cannot afford to buy a house as a result of this are being forced to rent out the properties from the people causing the problem. In effect, it shows that there is exploitation happening in both the housing market and rental market.

The problems caused in the housing market

  • Increased pressure on production firms
  • Increased pressure on the government
  • Increase in older population saving later in life as they are forced to save money for their children as first time buyers
  • Increase in the average age of a home owner
  • More people living in social housing or without a home altogether
  • The rise in prices and therefore mortgages, resulting in people having less disposable income to spend on goods and services, affecting economic growth

Potential solutions for solving the housing market crisis

  • The removal of restrictions on plots of land and construction processes

This will consequently help to boost the supply of houses to the market in order to meet demand as companies are able to build homes on more land, making efficient use of resources. However, this may cause petitions and/or arguments from local residents around certain areas of land as they fight to protect the value of their own home.

  • Restrictions on foreign and second-home ownership

Doing so will lessen the demand for houses as less people are able to purchase one as a result of a government policy. However, this could reduce the migration to our country which in turn affects our economic growth or it could negatively affect the incomes of those who have already begun to invest in property too.

  • Increased government provision of housing

This will also lessen the pressure of supply as the government's role will be revived in building houses for the population once again, causing an increase in the supply for houses in order to meet demand. However, this may end up flooding the market if done too quickly and decrease house prices too rapidly.

Created By
Hannah Richardson

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