Demand-side factors

1. Affordability. Rising incomes mean that people are able to afford to spend more on housing.
During periods of economic growth, demand for houses tends to rise. Also, demand for housing tends
to be a luxury good. So a rise in income causes a bigger % rise in demand.
2. Confidence
Demand for houses depends on consumer confidence. In particular, it depends on people’s confidence
about the future of the economy and housing market. If people expect prices to rise, demand will rise
so people can gain from rising wealth. In a boom, demand for houses rises faster than incomes as seen
in the graph above.

3. Interest Rates
Interest rates play a big factor in determining the cost of mortgage interest repayments.

The majority of UK homeowners still prefer to take out variable mortgage rates (unlike the continent
where fixed rate mortgage deals are more common). Therefore any change in the base rate by the
Bank of England will immediately affect the mortgage interest payments. This is a major factor in
determining the affordability of housing. Mortgage payments take a high % of people’s personal
disposable income. (average is 25%, but, for some homeowners, it is higher.) If you have a £150,000
mortgage a 0.5% change in base rates will change your monthly payments by about £60 a month.
Therefore, even small changes in interest rates can deter people from buying.

4. Population

The population in England is forecast to grow to over 60 million in 2041 an increase of 6 million.

The demand for housing doesn’t just depend on the population but also the average size of a
household. Certain social and demographic factors are causing a rise in the number of households
(faster than the population increase). These demographic changes include issues such as:
age of people leaving home

The demand for housing doesn’t just depend on the population but also the average size of a
household. Certain social and demographic factors are causing a rise in the number of households
(faster than the population increase). These demographic changes include issues such as:
age of people leaving home

 Increased life expectancy, leading to more single old people

  Divorce rates, – increasing number of single-parent families.
 5. Mortgage availability

 Another factor that determines the effective demand for houses is the willingness of banks to
lend mortgages. If banks give mortgages with bigger income multiples, then the effective
demand for houses is greater. The willingness of banks to lend mortgage finance can vary
depending on the strength of the interbank lending sector. The Credit crisis of 2008, has seen
a sharp rise in the cost of interbank lending and a fall in availability of mortgage finance.
Many mortgage products have been withdrawn, making it more difficult for would-be
homeowners to get on the property ladder.

 Increased life expectancy, leading to more single old people

 Divorce rates, – increasing number of single-parent families.
6. Economic growth and real incomes. Rising incomes enable people to afford bigger mortgages
and encourages demand for housing. In boom times, demand for housing grows rapidly suggesting
demand for houses is income-elastic

7. Cost of renting.

This shows 22% increase in the cost of renting – despite the financial crisis and housing ‘crash’ – this
helped to cause UK house prices to continue rising after 2011.

If the cost of renting rises, then households will make greater efforts to try and buy a house as buying
a house through mortgage becomes relatively cheaper. The UK housing market has been buoyed by
expensive renting costs, which encourages buy to let lenders and encourages households to stretch
their budget as much as possible to get on the housing ladder.