What causes house prices to rise?
Prices rise through a combination of factors on both the supply and demand side of the housing market. When demand is rising and the short run supply of housing available in the market is limited, it is quite easy for market values to be pushed significantly higher. Consider the diagram below which illustrates the effect of an increase in market demand for properties in a particular area. Supply is relatively inelastic so that when the demand curve shifts out, the equilibrium market price will rise to P2.
Demand-side factors affecting the housing market
The demand for housing depends on many factors. The main factors are the cost of mortgage finance (including mortgage interest rates and credit availability), the real incomes of potential home-buyers and the general level of consumer confidence. In 1999-2001 the total demand for housing in the UK remained strong. A number of reasons explain this •Record levels of total employment and unemployment at a 20 year low •Low nominal mortgage interest rates with heavy competition among mortgage providers to sell low-cost fixed-rate mortgages •High levels of consumer confidence
•Rising real incomes for those in work
•An increase in household formation due to an ageing population, increasing numbers choosing to remain single and rising rates of divorce and separation •High levels of speculative demand for housing (for example a high level of foreign investment demand for property from overseas buyers in Greater London) Supply-side factors:-
Limited supply in local markets can exaggerate house price movements •A shortage of good quality properties in many areas forcing up market values •Restrictions on the supply of building land particularly in the south-east where the demand for housing is strongest...