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Macroeconomics: The Aggregate Demand for Housing What are the main macroeconomic factors affecting the aggregate (ie total demand) demand for property? Real Income Interest rates Consumer confidence Economic growth Unemployment 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. Unemployment 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 properties. 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 demand. 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 mortgage 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 Expectations 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 house. |