Main factors that affect the housing market are as
follows:-
- Economic growth. Demand for housing is
dependent upon income. With higher economic growth and rising
incomes, people will be able to spend more on houses; this will
increase demand and push up prices. In fact, demand for housing is
often noted to be income elastic (luxury good); rising incomes
leading to a bigger % of income being spent on houses. Similarly,
in a recession, falling incomes will mean people can’t afford to
buy and those who lose their job may fall behind on their mortgage
payments and end up with their home repossessed.
- Unemployment. Related to economic growth is
unemployment. When unemployment is rising, fewer people will be
able to afford a house. But, even the fear of unemployment may
discourage people from entering the property market.
- Interest rates. Interest rates affect the cost
of monthly mortgage payments. A period of high-interest rates will
increase cost of mortgage payments and will cause lower demand for
buying a house. High-interest rates make renting relatively more
attractive compared to buying. Interest rates have a bigger effect
if homeowners have large variable mortgages. For example, in
1990-92, the sharp rise in interest rates caused a very steep fall
in UK house prices because many homeowners couldn’t afford the rise
in interest rates.
- Consumer confidence. Confidence is important
for determining whether people want to take the risk of taking out
a mortgage. In particular expectations towards the housing market
is important; if people fear house prices could fall, people will
defer buying.
- Mortgage availability. In the boom years of
1996-2006, many banks were very keen to lend mortgages. They
allowed people to borrow large income multiples (e.g. five times
income). Also, banks required very low deposits (e.g. 100%
mortgages). This ease of getting a mortgage meant that demand for
housing increased as more people were now able to buy. However,
since the credit crunch of 2007, banks and building societies
struggled to raise funds for lending on the money markets.
Therefore, they have tightened their lending criteria requiring a
bigger deposit to buy a house. This has reduced the availability of
mortgages and demand fell.
- Supply. A shortage of supply pushes up prices.
Excess supply will cause prices to fall. For example, in the Irish
property boom of 1996-2006, an estimated 700,000 new houses were
built. When the property market collapsed, the market was left with
a fundamental oversupply. Vacancy rates reached 15%, and with
supply greater than demand, prices fell. (Irish house prices fall
50%)