Why do house prices change?
House prices have changed a lot over time.
The average house price was a little over £10,000 back in 1977. Roll forward 40 years and the average price has risen to £200,000. Even with the general increase in the prices of goods and services, house prices are now around three times as expensive as they were in the late 1970s.
There are a number of things that affect house prices.
For one thing, house prices tend to rise if people expect to be richer in the future. Normally that happens when the economy is doing well as more people are in work and wages are higher.
House prices also tend to rise if more people are able to borrow money to buy houses. The more lending banks and building societies are willing to provide, the more people can buy a house and prices will rise.
The Bank of England also affects house prices through setting the key interest rate in the economy. The lower interest rates are, the lower the cost of borrowing to pay for a house is, and the more people are able to afford to borrow to buy a house. That will also mean prices will tend to be higher.
There are also more fundamental reasons why house prices may change.
For instance, demand for housing may rise if the population is increasing or there are more single-person households. Growing demand usually means higher house prices.
Prices will also tend to be higher if fewer houses are built, reducing the supply of housing. The fewer houses that are built, the more people will need to compete by increasing the amount of money they are willing to spend to buy a house
There have also been times when house prices have increased a lot just because people think prices will continue to rise. This is called a housing market bubble. Bubbles are always followed by housing market crashes when house prices fall sharply.
This happened in the 1980s. Between 1984 and 1989 house prices doubled, which was much higher than the growth in people’s earnings. The unsustainable rise was followed by over five years of falling house prices. It then took until 1999 before house prices had recovered to the level they were in 1989.