What are the factors that affect house prices

House prices are affected by a number of reasons – from the postcode sector, to local amenities.

One of the major factors that enable house sales – and therefore have an affect on prices – are rising incomes. An increase in salary allows people to spend more on buying a house.

However, the ratio of house prices to income can vary considerably and, if the economy goes into a recession as in recent times, and unemployment rises, the demand for buying houses would fall significantly.

Interest rates can also impact the cost of paying for a mortgage. Interest rates are very important, as mortgage repayments usually constitute the largest proportion of a homeowner’s monthly outgoings.

In the UK, the majority of homeowners have a variable mortgage, which means an increase in rates will cause the cost of mortgages to rise – therefore deterring people from buying and, as a consequence, house prices will fall.

The availability of mortgage finance also plays a huge role in affecting the cost of houses. With the deregulation of the banking sector, there has been a steep rise in the number of mortgage products available.

Products such as interest only – and mortgages up to 6 times annual income – have enabled people to get a mortgage more readily, thereby increasing demand for housing. However, during the recent economic crisis, the number of mortgage products on offer fell, due to a shortage of finance in the money markets.

Another factor in determining house prices is consumer confidence. When confidence is high, people are more willing to take out riskier mortgages, to be able to buy a house.

Before the credit crunch, many people were optimistic about the housing market, so took out mortgages with a higher debt-to-income ratio. This is no longer the case, and house prices have tumbled.

One very important issue to consider is employment rates. When unemployment is high, demand for housing to buy tends to be low, and vice versa.

We should also take into account demographics, when it comes to the price of houses. The amount of households in the UK is steadily on the increase, which, in turn, means that there is a higher demand for housing.

This is due in part to an increase in immigrants from Eastern Europe, as well as a rise in divorce rates, and also an escalation in life expectancy rates.

The price of rented accommodation can also affect house prices. For first-time buyers, this has become a more viable option, as getting a mortgage is so difficult nowadays. For this reason, there has been an increased demand for rented properties, leaving the to-buy market stagnant.