Macroeconomics: The Aggregate Demand for
What are the main macroeconomic factors affecting the aggregate (ie total demand)
demand for property?

Real Income
Interest rates
Consumer confidence
Economic growth
Housing affordability
Future house price expectations

Real Incomes
Privately owned housing is a normal good. Therefore as incomes increase demand for
housing expands and people are:-
more willing to pay higher prices
move up the housing ladder

Interest Rates
Since most homes are purchased with a mortgage, changes in interest rates affect
demand for housing.
If i increases repayments of variable rate mortgages increases, the cost of owning a
home increases and this causes growth in house prices to be checked.

Consumer confidence
Consumer confidence is important. If people think the state of the economy will worsen
people will become less optimistic about their futures (worries over unemployment, falling
incomes and increasing interest rates) and consequently people will be less willing to pay
high house prices and first time buyers may be less willing to enter the market. This
affects demand and prices may increase less quickly or fall.

Economic Growth
When the economy is enjoying sustained growth and rising prosperity, improved
confidence raises the number of homebuyers.

Buying a house is a long-term commitment – mortgages can last for 25-30years!

In areas or regions when unemployment is persistently above the national average,
incomes will be lower and this limits the number of people who are able to afford

These macroeconomic factors, incomes, employment and confidence are critical in
determining the direction of house prices. When these three factors are rising the
conditions are normally in place for sharp upward movements in prices. In recent years
the economy has enjoyed steady growth, falling unemployment, low interest rates and
stable consumer price inflation. In other words, the macroeconomic fundamentals have
been good for the housing market and have supported a period of strong housing

Housing Affordability

Housing affordability can be expressed either by

ratio of house prices to average incomes. Or
monthly mortgage repayments

1. Ratio of house prices to average incomes

if property prices are low relative to incomes, this encourages people to move up the
housing ladder into larger and more expensive properties.
This then helps to open up the supply of lower-priced housing on the market and provides
incentives for younger first-time buyers to find their ideal starter-property.

Notice here important inter-relationships between different parts of the housing market. If
people entering the housing market are unable to buy because of poor affordability,
these impacts on other home-owners and property-buyers further up the housing chain.

The sharp acceleration in house prices in the late 1990s and early years of the new
decade has taken the affordability measure close to five times average incomes – the
highest figure since the housing boom of the late 1980s. Rising prices have “priced many
people out of the market”

This problem has been resolved by buy to let investors who have grown in
number to fill the gap left by first time buyers being priced out of the market
or delaying their purchases.

There are big regional variations in the figures and wide differences within local areas
– but despite this, most housing experts believe that housing in the UK remains
reasonably affordable by historical standards. The main reason is that
interest rates
are lower than at any time in the last twenty years. (update: due to
credit crunch, interest rates have risen recently - see other articles.)

2. Monthly mortgage repayments

How much of monthly income is taken up by mortgage repayments?
When prices and interest rates are low, potential homebuyers will be attracted into the
market in the expectation that they can keep up with their mortgage commitments.

Affordability has worsened if we focus solely on the ratio of average house prices to
people’s incomes but the burden of meeting interest payments on mortgages has
declined in the early years of the 21st century because of falling interest rates

Expectations of future price movements and housing demand

of changing prices can have a considerable bearing on the demand for all
types of property. If house prices are expected to fall people will be reticent to buy a new
house and if prices are expected to increase this will encourage people to buy a new