The Nature of the Housing Market

Introduction

According to the World Economic Outlook (2007), the housing market, unlike other markets, is distinct in nature. For instance, the supply and the demand in the market are hardly fulfilling and when the demand goes up, the supply may not always be sufficient and may take a considerable time to satisfy the demand. This is because houses take a relatively long period to be constructed; the supply of houses in the short run is normally said to be fixed. Houses can also be taken as assets that are intended to pay back income in terms of the amount of rent that the owner saves when he builds or possesses a house.

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House prices, like other products, are not stable and house owners are normally exposed to great risks especially when prices fall. On the other hand, when prices go up owners may experience either positive impact (bubble-builder impact) or negative impact (bubble-buster impact). These are some of the effects that come with changes in house prices in the housing market. This study looks at those factors that determine house prices, the reasons why the UK has experienced a fall in house prices since mid-2008, and the effects of the fall of house prices in the UK. It also tries to come up with ways in which the UK government can help overcome the situation (OECD Economic Survey: UK 2005).

The main demand and supply factors that determine house prices in an economy

The rise or fall of the housing prices is determined by the forces of demand and supply in the housing market. These include:

Supply factors

A limited supply of houses makes the number of houses available scarce and this normally raises prices. On the other hand, a high supply of the number of houses pushes prices down. It has been noted that factors that lead to the limited supply of houses normally favor growth in the housing markets due to the rise in prices and improved value. These supply factors that have favored growth through a rise in prices include (Artis 1996):

The re-adjustment of growth plans in those areas that have an excessive supply of new housing. When there is an oversupply of housing builders go it slow in coming up with more houses and with time, the oversupply of housing is depleted and a state of balance between demand and supply is achieved. The balance leads to moderate house prices but again if the building of new houses remains slow the supply goes down and the prices start to escalate. The rising prices trigger the developers to invest more in housing leading to an oversupply. Other factors kept constant the cycle will continue with times of high supply and low prices alternating with times of low supply and high prices.

The regulations o land use, the availability of land for development, and all associated costs limit the supply of new houses in given places. How the regulation of land use affects housing prices can be seen where the regulations limit the type of land use of a given place. Where the land is limited to housing, there will be a scarcity of land for other purposes and on the other hand, there will be an oversupply of land for housing hence low land prices leading to low housing prices. On the other hand, where the land is limited to other purposes apart from housing, there will be scarce land for housing hence high prices leading to high housing prices in that region.

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Demand factors

Housing prices are also, to a great extent, affected by the demand for housing (Artis 1996). Those regions with low demand for housing tend to have cheap houses as compared to those regions where housing is in high demand. The Economic Outlook (2003) put out that, there are several factors that affect the demand for housing in a given region. They include:

If a region is experiencing high job losses and unemployment, the demand for housing goes down while on the other hand if there is a high employment rate in a region; it implies more people living in the region hence the high demand for housing.

The increased demand for vacation housing or second homes also increases the overall demand for housing in a given area.

The persistent demand for entry-level homes by people immigrating into the country is a long-term factor affecting housing prices.

Forecasting also affects the demand for housing in the sense that when the forecasts are made people will start readjusting and will not be caught unawares. For example, if forecasts are made of an increased inflow of people into a given region, investors in housing will move strategically to tap the opportunity and therefore when the inflow of people will find already available housing hence there will be no shortage, that is, the demand and supply will be at equilibrium.

Summary

In summary, the ever-rising incomes and wealth of people, the rise in need for homes all affect the demand and supply of housing. Wages, however, especially among the low-income earners, are not at par with the housing costs hence housing remains unaffordable to many and this, in turn, acts as a major factor determining the prices of houses.

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