Factors influencing House prices
Housing market operates under similar conditions which the other categories of markets operate in. Notably, the same factors that affect demand, supply as well as prices in other markets also do apply in the case of housing market. Arguably, house prices have become one of the common topics that are being discussed in almost all parts of the world. There are a number of factors that affect the housing market. Basically, as mentioned above, just like any in commodity market, housing market is generally controlled by supply and demand forces. Therefore, the major objective of this essay will be to analyze the various factors that have influence on the price of houses as well as how these factors influence such prices.
As noted, there are a number of factors that influence the prices of houses in the housing market. Some of these factors are related to the house itself while others are related to the housing market in general. To begin with, income and employment are two factors that are related and play a significant role in the determination of prices of houses. From the economic point of view, employment acts a source of income for people. Moreover, income plays a major role in stimulating demand in the market (Suzanne, 2010). Arguably, when people have more income they always demand more commodities. Therefore, when the rate of employment increases, the prices of houses are like to increase. This can be explained by the fact that when the number of employed people increases, the number of people who can afford to buy a house also increases. Additionally, an increase in personal income would also increase the demand for houses, which will lead to an increase in the house prices as mentioned above (Megan, 2010). This is generally based on the assumption that price and demand have an inverse relationship. Therefore, when demand increases, prices are likely to increase based on this principle.
Secondly, availability of mortgage finance also has an influence on the price of houses in the housing market. Arguably, in the recent past, there were severe restrictions on the availability of finance. Nevertheless, regulation on the banking sector has led to an increase in competition, which has in turn led to an increase in the number of mortgage products. Some of these products include, self-certification mortgages and interest only are attributed to the increase in the demand for houses. Nevertheless, the recent economic crisis the mortgage products that are being offered have greatly declined due to a reduction of finances in the money markets (Suzanne, 2010). This has led to an increase in the rates of interests that are paid on mortgages. An increase in the cost of mortgage discourages people from buying and on the extreme it may force individual to sell their mortgages. Basically, a decline in the demand for houses attributed to an increase of interest rates paid on mortgages will lead to a decline in the prices of houses (William & Michael, 2007). The following graph is of interests and money supply. Q indicates the number of house that are demanded at a given time, ‘I’ is the interest rate, while S is the money supplied within a given time.
From the graph, when money supply in the economy declines, from Slf –Slfi, possibly due to poor economic performance, interest rates increases from ir1-ir2. As such, mortgages becomes expensive which reduces the demand for houses, Q*-Q1. Precisely, an increase in the interest rate leads to an increase in house prices which in turn leads to a decline in the demand of houses.
Another factor which also influences the price of houses is demographic factors. Notably, the number of households has been increasing in almost all parts of the world in general, but specifically in the developed world. Undeniably, the number of house increases at a higher rate than the population when there is a decline in the average family size as well as when more single individuals live alone. As such, some of the demographic factors which can lead to increase in the demand for houses are; an increase in the rates of divorce, a decline in marriages, early separation of children from their parents, as well as an enhancement of life expectance. Increase in the demand of house would in turn increase the price of house (BBC News, 2010).
Supply of houses also plays a remarkable role in impacting the price of house. However, it should be noted that, in the short-run, there is a fixed supply of houses based on the fact that houses takes a significant period of time to build. Therefore, in the short-run, the impact of supply of houses can be said to be negligible (Colin, 2008). However, influence of supply of houses can be felt in the long-run. Some of the factors that determine supply of house in the long-run are; accessibility of planning permission, builders’ opportunity cost, as well as a change in the cost of constructing houses. If these factors do not favor an increase in the supply of more houses, the demand for house will increase; leading to an increase in the prices of houses (William & Michael, 2007). However, if these factors enhance supply of more houses, demand will lower as in comparison with supply; which means that prices of houses would be lower. For instance, studies have indicated that due to long-term deficiencies of houses in the UK, prices of houses are expected to go up in the long term. However, in the United States, lately there is a surplus in house supply; hence, a bounce back in the property market is not expected (Megan, 2010). As mentioned above, there is a negative relationship between price and demand while there is a positive relation between supply and price. The following is a graph which indicates the relationship between supply, demand and price of houses.
From the above graph, in the short-run there is less supply of house which leads to an increase in prices as the demand is higher in comparison to supply. On the other hand, in the long-run, chances are that supply of houses will increase leading to a decline in house prices which is attributed to low demand in comparison with supply.
Notably, the economy influences the housing market as a whole. During poor economic performance, individuals have less money to spend. Most individuals also lose their jobs or rather their earnings reduce during this period as almost all the sectors of the economy are experiencing constraints. Therefore, rather than spending income on houses, most individuals prefer using these income in meeting other pressing needs. Additionally, a good number of individuals with mortgages experience difficulties in making their mortgage payments; hence, there are high chances that they will lose their homes. Rather than losing their house due to failure to of paying mortgages, many individuals may deem it right to sell their houses at any price. This is what happened in the United States during the recent economic crisis (BBC News, 2010). The value of most homes declined significantly than before. On the other hand, in case of an economic boom, prices of houses will increase due to an increase in demand as most people will be willing to spend on houses.
Location of the home contributes to the price that will be attached to a house. A similar home will cost different in a local area as compared to if it is located in an urban area. Some of the factors that are attributed to the different prices of the same house in different locations are: roads as well as other infrastructures, in that a house will cost more where these infrastructures are accessible than where they are not; rates of crimes, in the sense that houses will cost more in low crime areas as compared to locations where there are high crime rates, and lastly is the quality of the neighborhood (BBC News, 2010). As such, location of a house is a determining factor for the prices that are attached to houses in the housing market (Colin, 2008).
Like in the case of in the commodity markets, speculations influence the prices that would be attached to house at one given point. For example, in the commodity market, if people perceive that prices are like to increase in the future they are likely to buy more of that commodity currently than waiting to buy in the future. The same thing also happens in the housing market. When people speculate that prices of houses are likely to increase in the near future, they are likely to invest more on houses now to avoid incurring the speculated increase of prices (Colin & Craig, 2009). However, if it is speculated that prices of houses are likely to fall in the near future, most individuals may postpone investing in houses so as to take advantage of a reduction of prices in the future as it is speculated. Therefore, to some extent, speculations influence the price of houses. For instance, most foreigners invested in houses in the United Kingdom during the economic boom as it was speculated that the prices of houses were likely to increase (BBC News, 2010). On the other hand, based on the recent economic crisis, it has been speculated that the prices of house will continue declining and most investors have reduced their investment in the housing market.
Perhaps, costs of construction influences the price of houses as well. Arguably, if the cost of building supplies as well as other materials begin to rise, the additional cost will be passed on to the buyers. Consequently, prices of houses will increase significantly. In the long-run, the demand for houses will decline as well as the supply of houses due to lack of market and an increase in the cost of construction (Colin, 2008). Besides construction prices, another thing that affects house prices is the degree of confidence of the consumers. Consumers are likely to purchase house when they are confident of the stability of their economic status. However, when they are worried about the future as far as prices and other factors in the housing market is concerned, they may prefer to wait. Thus, building costs as well as the confidence of consumers have a share in the prices that will be associated with houses in the housing market (BBC News, 2010)
In conclusion, housing market is similar to other kinds of market in various ways. Therefore, the same factors that affect demand as well as supply in these markets, also apply in the housing market. To be more precise, house prices are usually affected by various factors. Some of these factors may be related to the house itself while others relates to the housing market in general (William & Michael, 2007). Some of these factors are; the income of people, the status of the economy, the rates of employment in the given country, speculations, demand and supply effects, the cost of constructing houses, the confidence of the consumers, as well as the existing interest rates. However, it is of importance to note that all these factors affects house prices in from different perspectives, some of which may be either direct or indirect (Colin & Craig, 2009).
References
BBC News (2010). House Prices fall Again in August, Says Nationwide.
Colin, J & Craig, W. (2009). Housing Markets and planning Policy. New York: John Wiley &
Sons.
Colin, B. (2008). The Global Property Investor’s toolkit: A Sourcebook for Successful Decision.
New York: John Wiley & Sons.
Megan, P.M. (2010). Factors That Affect Housing Prices. Retrieved on 9th June 2011 from
http://www.ehow.co.uk/list_5904815_factors-affect-housing-prices.html
Suzanne, R. (2010). Factors that Influence House. Retrieved on 9th June 2011
http://www.helium.com/items/1927803-factors-that-influence-house-prices
William, B. & Michael, M. (2007). Microeconomics. Washington: Cengage Learning.
