Over the past five years or so, house prices in the UK have been constantly changing. At times, house prices being on a rapid increase and at other times falling. This leads to a possibility of negative house equity. As per Sloman and Garratt: “negative house equity is whereby the outstanding value of a mortgage is greater than the value of property against which it is secured.” (Text Book) Supply and demand are the main determinants of house prices, as the equilibrium of house prices will fall if demand rises and supply falls. An important characteristic of UK house prices identified from the UK house price inflation chart is the tendency of prices to rise over the long term, more quickly than incomes and consumer prices. This rise is because demand has grown faster than supply. There are several factors involving supply and demand analysis which I think have been important in affecting house prices in the UK over the past few years – These factors are: the change in incomes, the cost and availability of mortgages, speculation and consumer confidence. Incomes
From 2004 until 2007 the UK has been in an economic ‘boom’ with rapidly increasing incomes and an annual rate of house price inflation exceeding 25% around 2004, as shown in the house price % change graph. “As average living standards rise, the total demand for housing expands, as does the demand for more expensive properties as people look to move ‘up market’.” (second website) People with the extra money invested in houses by either buying or moving to better houses. They thought that their incomes would continue to grow, thus in the short term stretched themselves financially by buying expensive houses in hopes that their mortgage would become more affordable as mortgages were up to three times their salaries. Therefore rising incomes enable house prices to rise as there’s a higher demand. The supply of housing was inelastic as more people were selling and moving to “better homes,”...
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