House Price Inflation – Government assessment of pressuresMake Text Bigger
The Ministry of Housing, Communities and Local Government has released a short analysis illustrating the individual relationships between some important housing market pressures and house prices.
The report is not intended to be exhaustive and has limitations, but uses relationships estimated from the affordability model in the 2007 and 2008 reports by the National Housing and Planning Advice Unit (NHPAU). Click here to see the full report.
The analysis starts with the assumption that housing is a mature market and that Price is determined by the forces of Supply and Demand.
The 2008 NHPAU, ‘Affordability still matters’ report estimates the key drivers of house prices and their relationship with affordability sets out that holding all else equal:
- If the number of households increases by 1% (Demand), house prices would increase by about 2%
- A 1% rise in real incomes (Demand) would increase house prices by 2%
- If interest rates increase by one percentage point (Demand) then house prices would fall by around 3%
- If housing stock increases by 1% (Supply), house prices would fall by around 2%
From 1991 to 2016 the mix adjusted average house price in the UK increased from £54,000 to £206,000 (a 284 per cent increase). Deflating to 1991 prices using the Consumer Price Index, this is equivalent to a £70,000 increase over the same period in real terms.
In 1991, the population of England was 47.1 million. In 2016, the population of England was 54.5 million. This is equivalent to an increase of 16per cent over this period (1991 to 2016). As above a 1% increase in households should lead to a 2% increase in house prices meaning this population change should have led to a 32% price rise all else being equal.
The Immigration affect
Over the same period the non-UK born population of England increased from 3.5 million to 8.4 million. Therefore, the increase in the non-UK born population in England is expected to have led to a 21% of the overall 32% increase in house prices due to the Demands of an increasing population.
Real Income Growth
Over the 1991 to 2016 period there was a real term income growth of 75%. Applying the above ratios this demand led pressure should have raised house prices by 150%.
Interest Rate changes
Due to the wide range of interest rates pre-credit crisis from the period, 5-15%, and the subsequent levels below 0.5% there has been no estimated modelling of the effects interest rates have had on house prices whether inflationary or deflationary.
From 1991 to 2016 housing stock in England has estimated to have risen approximately 20% from 19.7 to 23.7 million. Using the 2 to 1 ratio this Supply increase is thought to have had only a 40% deflationary pressure on house prices.
Therefore, from the government estimates and assumptions, it is real terms income growth that is showing as the highest inflationary pressure on house prices from 1991-2016 with this only being marginally dampened by deflationary supply pressures.
Interestingly the estimates are saying that Population and Immigration growth have proportionately had less of an inflationary affect than you would at first think. However, this is a very simplistic and crude modelling of the Housing Market with many other factors also in play. It also assumes that the Housing Market is still very ‘mature’ with little influences other than pure supply and demand on price.
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