house price crash after brexit Factors that affect the Housing and Property Markets

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This is a detailed economic lesson on factors that determine house prices and whether property is a good investment. We look at the UK housing market and compare it to Germany. There are many factors that affect the price of a house and we explore many in this economic lesson.

You may disbelieve the headline, but it depends how you decide to evaluate house prices. Of course, the cost in pounds sterling of houses has risen significantly over the decades, but this is really just a demonstration of the fall in value of the pound, rather than the increasing value of houses.

We can show this by considering what it costs to buy a house in terms of commodities. If you look at the value of the house as ounces of gold, or as gallons of petrol, then house prices have hardly changed since the middle of the last century.

Price is relative, but you might think that increasing labour costs would have impacted the expense of building a house. Leaving out the cost of the land, the building cost for a house breaks down to approximately 50% labour and 50% material. Labour has gone up relatively, but material has gone down because of things like industrialization, which means that the bricks can be made in much greater quantities and more cheaply.

Each country and each society has various factors that affect house prices. Take for example Japan. The price of houses in Japan skyrocketed, so that they were no longer affordable. The answer to this which the Japanese adopted was to develop a three generation mortgage. The commitment to pay a mortgage could last as long as 100 years, and be bequeathed down to offspring.

Alternatively, consider the case of house prices in Germany. While Germany is a rich economy and you might expect house prices to reflect this through inflation, the price of houses in Germany has been relatively flat in monetary terms compared to other Western countries such as the UK and USA.

The reason for this may be because there is less speculation in houses in Germany, and they are not regarded in the same way. The homeownership rate is only 43%, and people tend to stay in the same place for longer. Another disincentive to buying and to moving is that costs are about double those in the UK. A typical buyer in Germany will pay about 8% of the purchase price in fees. Add to this the customary practice of putting down 30% - 35% as an initial deposit, compared to around 10% in the UK, and you can see that the housing market is naturally a lot cooler.

There are some other factors for housing in the UK that might result in a creep upwards in real cost. Demand is noticeably increasing, as immigration is up. Breakthroughs in healthcare mean that people tend to live longer, and consequently there are less houses coming onto the market, reducing the supply. The third factor is the societal norm of a lower occupation level. Some decades ago, families tended to stay together and live in the same house. Now it is more likely that there will be few people in living in a house, particularly given divorce rates and the required mobility of labour. All these factors will increase the demand.

house price crash after brexit Factors that affect the Housing and Property Markets
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