A lot of us know that prices of houses are too high because there are a lot of people and not enough homes. While this is true, the prices have also been raised by the billions of pounds of new money which banks developed before the financial crisis years
Banks made billions and set them into property
In the ten years up to the beginning of the financial crisis, house prices increased three times the normal price. A lot of individuals think this is because there weren’t enough houses in different areas, but that is only part of the discussion. A main cause of the increase was that banks possess the ability to develop money each time they form a loan. Along the period in question the amount of money banks generated through mortgage lending more than quadrupled! This lending was a major driver of the massive increase in house prices.
Property prices rise fast compared to wages
House prices increase more rapidly wages. This demonstrates that property become much less affordable. Any person, who did not already possess a house before the bubble begun growing, ends up offering more of their salary just to pay for shelter. And it isn’t just property buyers who are affected because later the rents go up too, inclusive of social housing.
This rise in prices led to an immense rise in the sum of money which first time buyers spent on repayment of their mortgages.
Demand is growing
An economic simple truth is if demand rapidly increases than supply then prices will increase. Regardless of other short-term fluxes, demand for housing has been growing at a quicker rate than the supply. The population of United Kingdom continues to raise. The forecast is for 71 million by 2033. Also, the number of households is growing at a faster rate than the population. Changes in demographics, such as single people living alone and higher divorce rates have demonstrated a growth in the number of households.
Constraints on house supply and house building
Due to the rising number of households and rising demand for housing, the government approximate that they need to build thousands of new houses a year, just for keeping up the pace. However, despite a lot of politicians discussing the necessity of building houses, in practice, we have an inability to build homes. House building is on its lowest level since the Second World War. The implication of this growing demand in comparison to inadequate growth in supply is that there’s a strong economic pressure on prices.
When Spain and Ireland experienced a housing boom, they developed 400,000 houses a year. During the bubble burst, there were a lot of unsold properties. This excess housing stock dragged down prices. The United Kingdom never had this supply in excess, which explains why prices did not fall as fast.
Strong demand for home ownership
In recent years, the percentage of people buying for the first time first time has decreased. The number of persons able to buy a property has dropped, because of the drop in affordability. However, there’s a solid economic and cultural desire to possess your property. Increasingly popular is for parents to assist their sons and daughters in buying houses, with a deposit or even putting the mortgage in their name. This has allowed first time buyers to surpass the unmanageable income multiples and buy regardless of the expensive prices.
Speculation to let
Regardless of the impulsive nature of the market for housing, housing has progressively been seen as a good investment. The proceeds on buying a home have constantly outdone the stock market. This has stimulated another generation of buy to let investors; this has assisted in increasing demand further. In London, there’s been major demand from foreign nationals such as Arabs and Russians. Others argue this speculative growth in demand means the high property prices are not sustainable and are liable to decrease. It also means that the market for housing is very regional with London prices strongly outperforming other regions.
Renting is also expensive
The alternative to buying a house is renting. However, the prices for renting have also increased rapidly than wages. If you are paying $800 a month, it makes sense in trying to acquire a mortgage where you will be paying $900 a month. The amplified price of renting reflects the fundamental inequity in supply and demand. It’s true that the price of housing is now expanding faster than renting, but it still makes economic sense to buy rather than rent. This means individuals are progressively looking towards unconventional mortgages to assist them buy a property.
The expensive nature of the UK housing market raises significant concerns such as – lack of geographical mobility, wealth and income inequality, an economy vulnerable to boom and busts in house prices. But, it doesn’t look like changing in the near future.