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The prices are determined by demand and supply
in free economy. The shifts in demand or supply will be followed by a change in
market price. The purchase price is also inflected by inflation: all prices
normally grow annually at the rate of inflation. Bigger or smaller increase
will be because of some particular reason.
In housing purchases demand is inflected mostly
by people's incomes, the price of other goods (mostly expensive ones, e.g.,
cars), population and the Government's policy of giving mortgages etc.
As the house prices have increased, so are the
incomes and the ratios of house prices to annual income have remained mostly the same, being around 2.6 for house
prices. The house prices for new dwellings have risen from £4400
in 1968 to £7000 in 1972. The price of the existing dwellings went up
even quicker: from £4300 in 1968 to £7500 in 1972. The incomes have risen from
£1618 to £2474 at the same time. It can be assumed, that when the income
raises, then raise also the prices of houses. This can be expressed
graphically:
But in 1972 there was a big jump in house prices
and although annual incomes rose as well, the ratio reached to 3. That can be
explained by looking at the estimates of average weekly earnings and average
weekly salary. People with a bit worse job have usually earnings and
vice-versa. So most of the "clients" for houses are people, who get
salary. The rose in salary has been more sharp in last years than the rose in
earnings. That is why the annual incomes figure is a bit incorrect - in reality
in 1971/72 the people's, who most probably actually bought the house, rose
almost as sharply as the prices of houses did. The annual incomes rose less, because
the earnings did not rise so sharply. The earnings rose from £23.0 per week in
1968 to £32.1 per week in 1972. The average weekly salary rose from approx. £30
in 1968 to £43.4 in 1972, being only £35 in 1972.
The second determiner of the prices, which I
have information about is the government policy of giving mortgages. The rate
of interest, which determines mostly the purchase of mortgages rose massively
from 1968 7.6% to 1969 8.5%. Since that, it has remained 8.5% except in 1971
when it dropped to 8.0%. The average value of mortgages has increased from
£32000 in 1968 to £5200 in 1972. The massive raise in value was in 1971 and
1972, at the same time the house prices rose quickly as well.
That is all the information I have gotten from
demand. The price changes from demand side could have been examined more
carefully and accurately if I could have also gotten information about
population changes at that time and about the change in other necessary but
expensive goods (e.g., cars).
The other factor, which influences the market
price, is supply. The supply generally has fallen from £413700 of houses in
1968 to £319100 in 1972. This is mostly because of the public sector, where
production has fallen mostly. In private sector after a fall in 1968 the number
of houses being built have risen slowly. This is shown in the graph below:
It is clearly seen, that the number of houses
being built influences the price of houses in great extent, e.g., when the
production contracted in 1972, the prices of houses (mostly used ones) went up
quickly.
Although the number of houses being built gets
smaller, the value of houses has started to raise again, after a fall from 1968
to 1970. The value of houses in 1968 was £m1256 in 1970 it dropped down to
£m1134 and rose again to £m1416 in 1972. That is certainly one of the reason,
why the prices of houses have risen - the production of houses has increased.
The cost curve for houses looks like this:
These were the factors that influenced the
production and which I had information about. For a better understanding of the
behavior of house prices the amount of sellings/purchases actually made in Britain
could have been good. If I can estimate the sellings of new dwellings through
house building figures, then I can't estimate the sellings made with existing
dwellings. That could have help to understand the housing problem generally as
well.
One more aspect, which is linked closely with
housing, is migration. The net migration figure is very important, as it
determines in great extent how many houses are sold and how many are needed.
The age content of population determines the
demand for houses as well. If most of the people are 20-30 years old, the
demand is higher, because they want a separate place to live in. That data is
relevant for housing problem as a whole as well.