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Overview of the UK Housing Market

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Overview of the UK Housing Market

The analysis of housing market of UK is an interesting aspect for several reasons. Housing market in UK holds a pivotal position in the economy. As compared to other European nations UK has a much higher owner occupation rate. In 2011, UK’s owner occupation rate was 70% as compared to a rate of 45% in Germany and 56% in France. The housing price in UK has constituted a steady upward trend in the last few years. The housing market experienced two biggest bubble during world crisis of 1980 and 2008 (Wilcox and Perry 2014). The price showed an upward trend from 1995 to late 2000 and suddenly declined in the phase of crisis. The bubbles are mainly caused by ease of bank regulation and restricted supply resulted from restriction imposed on land. Different demand and supply side factors together determine housing price in UK. These factors include cost of construction, affordability, supply of credit, disposable income and others. The affordability of people and hence housing prices are also influenced by different government schemes such as Help to buy scheme, Shared Ownership, Starter Homes Scheme, right to buy and others (Kuttner 2014). The report evaluates factors affecting UK housing price from 2006 to 2016. Additionally attention has been also given on impact of different government schemes on housing price.

In 2016, the average housing price in UK has increased by 8.7%. The housing price continued to maintain a steady growth since 2013. The average housing price during this year was £214,000. The average price is higher by £17,000 in 2015 ( 2018).

The average housing price in UK has constituted a steady upward trend from 2006 to 2016. England is the main contributor of growing housing price trend in UK. Housing price in England grew by 9.3% in the year 2016. The average house price in England now is £229,000. In Wales, housing price grew by 4.9% for the past few years. The housing price is recorded as £145,000 ( 2018). The average house price in Scotland is £143,000 recording a growth rate of 4.6%. In Northern Ireland, housing price stands at £123,000.

The regional housing price trend shows London continues to be region having highest average house price of £472,000. The region was followed by South East and East England region where housing price stands at £309,000 and £270,000 respectively. The North East region recorded the lowest average price of £124,000 (Kuttner 2014). The local authority of UK has shown largest annual growth.

Factors Affecting UK Housing Prices

Different factors influencing housing price are economic state, interest rate, size of population and real income. Besides these demand side factors, the available supply of housing affect housing prices.

Economic growth: Income is an important determinant of housing demand. In the phase of economic growth, people experiences an increase in their income. The increased income raises ability of people to afford higher mortgage encouraging housing demand (Wilcox and Perry 2014). In times of economic boom, housing demand grows at a fast pace.

Affordability: Housing affordability depends on the income of people. Increasing income implies people can afford more houses. Demand of houses tend be highly income elastic.

The trend in UK affordability index shows that housing price increases at much faster rate than affordability does (Cesa-Bianchi 2013. This in turn means apart from affordability there are several other factors that influences demand for housing.

Interest rate

 A crucial factor affecting housing demand is the prevailing interest rate. Most homeowners in UK prefer to take mortgage payments that are variable in nature. Unlike fixed rate, the variable rate varies with central bank’s decision regarding interest rate dynamics (Clapham et al 2014). The change in base rate by Bank of England affects mortgage payments and hence, demand for housing.

In 1992, the interest rate in became as high as 15%. The high interest rate caused housing demand to collapse and housing demand fell to a large extent. The relatively ease monetary policy between 1990s and 2000s stimulates housing demand. In order to counter global financial crisis BOE has cut down the interest rate to a level of 0.5% during 2008-09 (Sá 2015).

Population is an important determinant of housing. Not only population but the pattern of demographics is more important in determining housing demand.  For example, an increasing number of people living alone in a single house implies a greater demand for housing. In addition to population, the average household size is an important factor determining housing demand. In UK, the population statistics shows an upward trend (Kuttner 2014). The growing population implies an increasing pressure on housing demand.

The willingness of banks to provide mortgage determines housing demand. The availability of mortgage in turn depends on relative strength of interbank lending sector of the economy. During the financial crisis of 2008, there was a sharp increase in interbank lending cost. Banks were needed to land to productive sectors and hence, there was a substantial decline in mortgage financing (Fitzpatrick et al. 2015). Banks during this time have withdrawn many of the mortgage products.

Impact of Government Schemes on Housing Prices

Renting is the alternative to buy house. When cost of renting increases then people find it more profitable to purchase new house. UK had experienced around 22% increase in cost of renting. For this, despite housing price crash and financial crisis housing demand continued to increase leading to an increase in housing price after 2011 (Hilber and Vermeulen 2016). The housing market in UK is characterized by expensive renting costs. This encourages people to expand their budget in favor of purchasing new houses.

Housing demand are often influenced by geographical factors. In UK for example while housing price in some areas may experience in decline while in other especially in London, Oxford housing price continued to rise (Myer 2016). In desirable areas housing demand exceeds supply causing an upward pressure in price.

The figure above indicates that house price for first time buyers in London is much high than that in north. In London, housing price is 9.0 times of their earning while north it is 3.3 times their earnings.

Supply of houses depend on the construction of new houses. In UK, after from the late 1990s and early 2000s, the supply of housing fell to 150,000 from 400,000 per year in 1960s. In UK, the planning restriction is an important factor limiting supply of new houses. Restriction has been placed particularly in building house at the green belt land. The constructors often face local opposition. The housing demand in UK fall significantly short of housing supply pushing housing prices upward. The demand for housing projected to grow to 232,000 a year by 2033 (Couch and Cocks 2013). Housing supply however is struggling to reach above 100,000 per year. Government in 2007 has set a target to increase the housing supply to 240,000 by 2016. Of this 70,000 affordable homes are to be constructed each year by 2010-11. However, the credit crisis of 2008 interrupted this target because of a decline in housing construction (Iddon and Firth 2013).

With different schemes of the government there is hope that the mortgage availability will increases construction of private dwellings. However, increasing mortgage availability will not solve other supply side constraint like regulation in planning and local opposition on large scale house building (Jones and Richardson 2014). The housing demand is growing at a must faster rate than addition to the stock of new houses, thriving pressure on prices.

The housing price continues to increase despite experiencing two housing crashes. Because of a relatively inelastic nature of housing supply even a small change in housing demand lead to a significant change in housing price (Cheshire 2014) The supply shortage is a major factor contributing to boom and bust in the housing market.


High demand and constraint supply of houses in the UK housing market pushes up housing price. This leads to affordability crisis in UK. In 2014, housing price in UK was recorded as second highest in the world. Housing valued the most in London and South East region. In order to resolve the affordability crisis, government in UK has designed several schemes (Ngai and Tenreyro 2014). Different housing market schemes and their consequences in housing price are discussed below

The Help to Buy scheme provide a stimulus to buyers who can only afford 5% deposit. A wide category of applicant can take advantage of this scheme as it is not restricted to the first time buyers. The scheme was first launched in 2013. The scheme initially has two parts. One is equity loan and other is mortgage guarantee. At the end of 2016, mortgage guarantee schemes has been ruled out. Under the equity loan scheme, buyers need to deposit only 5 percent of the property value. 20% of the value is offered in form of interest rate free loan while rest 75% is provided by means of a standard mortgage payment (Bramley 2013). Mortgage along with Help to Buy are provided both to the major lender like Santander, Barclays and Halifax and to the small building societies like Teachers and Newbury.

In the presence of supply side constraint, policies like Help to Buy results in an increase in housing price rather than increasing supply. Objective of this scheme was to increase housing demand which was expected to translate to new houses being supplied leading to an increase in home ownership. The evidences however revealed a completely opposite result. Housing supply in UK was found to remain unresponsiveness to the increased housing demand (Best and Kleven 2017).  The impact of Help to Buy scheme in UK is thus expected to become fully capitalized. Following this schemes, housing price has risen in several regions of UK. The effect was most prevalent in London and South East. Between 2013 and 2014 housing price in London has increased by 25.8% with an associated failure of building of new houses. Additionally, the scheme might have created a systemic risk for the government. Government stands to bear the associated risk of guarantee schemes.

As the name suggests, the shared ownership schemes allow buyers to purchase a share of the house. The share varied between 25 percent and 75 percent. Buyers can purchase home from the local housing association and pays affordable rent for the remaining part of the home not owned by the shared owner. In order to qualify for the schemes, household income of the applicant must not exceed £80,000. In case of London, the limit is £90,000 (Bramley 2013) 

Despite the significant impact of shared ownership to housing providers, however the overall impact of the scheme on homeownership is marginal. Nevertheless, many policy makers has supported expansion of such scheme in region such as London and South East where housing has become increasingly unaffordable. The housing market in UK has long been suffering from several constraints like lack of new residential construction, stringent mortgage market and associated affordability crisis in several regions (theguardian.com2018). The policy of shared ownership was targeted to overcome these constraint and allowed people to some share of a property. With this scheme people can have at least an equity stake in the property and thus requires a smaller burden of deposit and mortgage as compared to full ownership.

Additionally UK government has introduced different tax reforms to increase home ownership. One such reform is initiated in council and mansion tax. These two taxes reduce the incentive of building new houses in UK. Reforms in these taxes thus intended to increase the housing supply. Reform has also been taken on stamp duty land tax. Under the old tax rules, household need to pay stamp duty at a single rate imposed on the value of the property. With the reform, buyers now need to pay a tax on part of the property that lies within the particular tax band (Cheshire 2014). The division of band is same as the income tax.


Several demand and supply side factors are at play in determining housing price of UK from 2006 to 2016. Among the demand side factors affordability, interest rate, population growth and cost of rent are the major one. Housing demand is subject to change with a change in base interest rate controlled by Bank of England.  The housing market in UK has faced several supply side constraints. The restriction imposed on development of new houses, lack of incentive to build houses and other related factors result in significant shortage of housing.  Consequently, real house prices in UK has experienced a steady upward rising trend in the last few years. In order to encourage home ownership UK government has undertaken several schemes like Help to Buy, Shared Ownership along with reforms in some of the existing tax. However, these policies have only a marginal impact on housing market. More supply side policies are needed to resolve the affordability crisis and stabilize housing price.


Best, M.C. and Kleven, H.J., 2017. Housing market responses to transaction taxes: Evidence from notches and stimulus in the UK. The Review of Economic Studies, 85(1), pp.157-19

Bramley, G., 2013. Housing market models and planning. Town Planning Review, 84(1), pp.9-35.

Cesa-Bianchi, A., 2013. Housing cycles and macroeconomic fluctuations: A global perspective. Journal of International Money and Finance, 37, pp.215-238.

Cheshire, P., 2014. Turning houses into gold: the failure of British planning. British Politics and Policy at LSE.

Clapham, D., Mackie, P., Orford, S., Thomas, I. and Buckley, K., 2014. The housing pathways of young people in the UK. Environment and Planning A, 46(8), pp.2016-2031.

Couch, C. and Cocks, M., 2013. Housing Vacancy and the Shrinking City: Trends and Policies in the UK and the City of Liverpool. Housing Studies, 28(3), pp.499-519.

Fitzpatrick, S., Pawson, H., Bramley, G., Wilcox, S. and Watts, B., 2015. The homelessness monitor: England 2015. London: Crisis.

Hilber, C.A. and Vermeulen, W., 2016. The impact of supply constraints on house prices in England. The Economic Journal, 126(591), pp.358-405.

Iddon, C.R. and Firth, S.K., 2013. Embodied and operational energy for new-build housing: a case study of construction methods in the UK. Energy and Buildings, 67, pp.479-488.

Jones, C. and W. Richardson, H., 2014. Housing markets and policy in the UK and the USA: A review of the differential impact of the global housing crisis. International Journal of Housing Markets and Analysis, 7(1), pp.129-144.

Kuttner, K.N., 2014. Low interest rates and housing bubbles: still no smoking gun. In The Role of Central Banks in Financial Stability: How Has It Changed? (pp. 159-185).

Myers, D., 2016. Construction economics: A new approach. Taylor & Francis.

Ngai, L.R. and Tenreyro, S., 2014. Hot and cold seasons in the housing market. American Economic Review, 104(12), pp.3991-4026. (2018). UK House Price Index - Office for National Statistics. [online] Available at: [Accessed 17 Apr. 2018].

Ough, T. (2018). The state of the UK housing market in five charts. [online] The Telegraph. Available at: [Accessed 17 Apr. 2018].

Sá, F., 2015. Immigration and House Prices in the UK. The Economic Journal, 125(587), pp.1393-1424.

the Guardian. (2018). Shared ownership comes with risks – here's what to watch out for. [online] Available at: [Accessed 17 Apr. 2018].

Wilcox, S. and Perry, J., 2014. UK housing review. Coventry: Chartered Institute of Housing.

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