House prices not determined by supply and demand

In recent blog posts published by Bank of England researchers, John Lewis and Fergus Cumming confirmed that house prices are not determined by supply and demand – contrary to popular belief. They get governed by accessibility to finance. 

It is widely recognised that the housing market has boomed over the pandemic. There are many reasons for this change, mainly due to government schemes implemented to help the housing market. One of the more widely recognised schemes was the reduction in stamp duty. From 8th July 2020 to 30th September 2021, stamp duty reductions got put in place to encourage homeowners to buy and sell their property without paying stamp duty costs. 

The role of finance

With this in mind, there have been conversations surrounding house prices getting determined by supply and demand. Simply, the fewer houses there are available, the higher the prices – and so on. However, recent conversations suggest that this is not the case. Bank of England researchers John Lewis and Fergus Cummings constructed a twenty-year model which shows that the relative scarcity of housing has played almost no role at the national level since 2000 in rocketing prices.

Instead, the role of finance is boosting house prices across the UK. The monetary policy from the central bank is a lot to blame. Historically low interest rates are causing flow from future assets to be worth more. Therefore, this boosts the amount someone is willing to pay for the said asset. 

So, regarding housing, banks are willing to lend more and, borrowers are willing to take on more debt. The more this gets done, the higher people’s available money is to buy a house. Therefore, causing house prices to rise to keep the market steady. These changes have left buyers stumped as first-time buyers now need much more than their salary to buy an ‘affordable home’

Present day issues

Another factor currently affecting the housing market is the shortage of lorry drivers in the UK. Supplies for new build properties and existing property renovations are in short supply due to the lack of deliveries. Consequently, new build projects are being put on hold as they can’t get materials such as bricks, cement, and roof membranes to their site. So, this is having a significant effect on the housing market and causing house prices to fluctuate. 

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