Factors Affecting House Prices

There are many factors affecting property prices (both in the short term and the longer term). Most are obvious; some are subtler and have a domino effect on one another. To summarise the factors:-

Slow House Building – the supply (or building) of new homes has simply not kept up with demand for new property since 1995. This is the most important and fundamental macro economic problem with the UK housing market today. One of the reasons for this lack of supply is the Governments “brown field” housing policies (to protect valuable greenbelt land and areas) that have prevented house builders from building on greenbelt land to meet increased demand.

As a result of this supply problem, England is longer able to house its own population. In 1981 there were 4% more properties than households; by 2000 this surplus was less then 0.5%. However, by 2000 there were 4.2% fewer properties than households in London! and around 2% fewer homes than households in the South East. By 2001, only 162,000 properties were built while household growth was 220,000 in the same timeframe! Back in 1997, the DTI forecasted over 4 million new properties would be required by 2017 – this suggests a gap of one million homes needed to be built in support demand! This huge regional fall in the number of new properties being built means new property building is at it’s lowest for 77 years. Other factors affecting property prices are...

More Single People or Divorced – there are more one-person households as more and more people get divorced and / or are single parent families. These people require flats or marionettes. There has been a marked increase in the average age of the first time buyer. First time buyers are at their lowest since 1974. One-person households (particularly career women) have gone up by one million since 1991.

Of the one million homes required to meet demand up to 2017, 80% will be required by single people! In addition, more people are choosing to live alone (as opposed to out of necessity as a result of a divorce). Economists estimates that a quarter of all households will be single person dwellings in the next 5 years. As a result of these massive demographic changes, the demand for property for single or divorced has (and will continue to) increase dramatically.

Historically Strong Consumer Confidence – there has been massive spending on both property and personal luxury items (holidays, cars). Confidence has been underpinned by historically low interest rates and high levels of disposable income, low unemployment and a record level of mortgage borrowing. In particular, the proportion of mortgages that are “re-mortgage” has sky rocketed (see table across) as people release equity (cash) from their property by increasing their mortgage (or swap mortgage provider) and spend the cash (or credit) on holidays, conservatories, etc.

Ageing and Increased Population – by 2025, the UK population is officially predicted to grow by approximately 5 million people to an estimated 64.8m. The flood of illegal immigrants into the UK will only make this situation worse. This will continue to increase property shortages and hence underpin house price inflation. Demographics will change as people are living longer. Please visit the Office of National Statistics (ONS) at http://www.statistics.gov.uk/downloads/theme_population/PP2No23.pdf for further detailed regional information.

Social Changes – during the 1980’s home ownership was a social aspiration (under the vision of Thatcherism). Today in 2005, renting is seen as socially acceptable, as people’s attitudes differ in terms of lifestyles and values. The growth in the number of properties to let (targeted at middle income professionals) has created rental accommodation of good quality compared to previous decades. Indeed in most cases renting is more expensive than a mortgage repayment. People have chosen to rent as opposed to rent out of necessity.

Changing Working Patterns – increased demand in the contract market has led people to budget more carefully, typically renting and creating more demand for rented property. These skilled workers need the flexibility of renting to ensure that they are free to move around as employment contracts dictates (and not restricted to working within commuting distance of where they would have owned a property).

Impact of Price Changes in the South East - in predicting a housing crash or boom - Economists refer to the South East and London’s analogy of the “ripple effect” – where London is a pond, with its affluent commuter belt at its center, generating waves outwards. In trendy Fulham and Kensington, property prices have dropped by 15%. Although the boroughs of not representative of the rest of the UK, price drops are a worrying indicator.

Regional Prices - It is important to compare regional price sensitivity – the socio-economics’ of areas dependant upon manufacturing, are very different from the financial services led City of London. Further declines in manufacturing are mainly due to a high pound relative to European currencies and a flood of far east cheaper goods. This overvaluation of Sterling could raise manufacturing unemployment in the Midlands further still, impacting consumer local spending/ confidence and hence property investment.

All this crystal ball gazing should lead you to one obvious conclusion; that when considering your entry into the market as a landlord, despite the current high prices, letting should be thought of as a long term investment vehicle when trying to understand, quantify and calculate the future risks and rewards. In particular, planning is key - calculate your worst-case scenario, (if prices did fall significantly), using the accompanying Buy to Let calculator.

Further Reading - National Statistics - the UK's home of official statistics, reflecting Britain's economy, population and society at national and local level. http://www.statistics.gov.uk/economic.asp 

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