What Makes House Prices Rise?

Supply & Demand
Affordability Of Property & Market Confidence

What causes property prices to fall and rise? Will your home sell quickly or not? How does unemployment affect the housing market? Find out here...

By Kate Faulkner

Property prices in the UK are constantly changing. Since 1975, property prices have increased in the UK by approximately 3% a year*. However, although they are on the rise long term, in the intervening period they usually suffer a dramatic fall at least every 10 years, often coinciding with economic problems. For example, during the recession of the early 1990s prices fell, and in 2008 prices had a dramatic fall, swiftly followed by a recession primarily caused by the infamous 'credit crunch'.

However, even during the rapid growth of property prices between 1997 and April 2007, property prices rose and fell slightly while various factors caused buyers to hold off buying for a short period of time.

So what causes these small and dramatic property price fluctuations? There are four main factors which drive property prices up and down: property supply and demand; affordability of property; unemployment; confidence in the market.

Supply And Demand Of Property

Around the UK, there are thousands of property markets, which all react differently to contribute to the 'average' house price surveys, such as the Nationwide and Halifax produce. In fact, the 'average' house price they all quote is a statistical average, it's not based on a property that actually exists.

For example, there is a property market for two bedroom terraced properties; one for three bed terraced properties, and so on. And on top of this, there is a property market for Victorian or Edwardian two and three bed properties. There are also property markets for flats, rural farmhouses, listed buildings. All of these markets can react differently, in different areas depending on how many buyers are chasing the number of properties available. So in Nottingham for example, three bed Victorian properties may be more popular than new build three bed properties. In Cardiff, new build apartments may be more popular than Victorian terraces.

How Does Supply And Demand Impact On Property Prices?

If there are four buyers who want a three bed Victorian property and there is only one on the market, then the buyers are likely to compete to secure the property and it is likely to increase the price of the property. Meanwhile, just a mile down the road, a new housing estate may have 10 three bed properties for sale, but only five buyers. In this case, the developer will want to sell the properties so will keep dropping the price until at least five are sold.

The key reason for property prices increasing long term in the UK are that we have an overall shortage of properties versus demand. Our population is rising faster than the number of properties we have and even the new houses we are building. Even worse, the increased demand is for smaller households such as one and two bedroom properties, as people are getting married later and, with an ageing population also want to downsize to smaller properties.

*Nationwide Building Society, using Real House Prices