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.