In Britain, there is a certain fascination with house prices. There are at least ten indexes measuring house prices monthly, sometimes delivering contradicting results. There is a never ending set of TV programmes about buying houses in the UK and abroad, interior decoration, DIY, or making money on the property market. It all sounds so good and so easy. And it all assumes the market will continue its movement upwards for the foreseeable future. But will it?

Investors on the stock market are familiar with market fluctuations. They know prices go up, but they go down too. They know that mass psychology is an important factor in how prices fluctuate. When prices go up, a lot of people seem to think that will continue forever. When it doesn’t, panic settles in and the market reverses its momentum.

For that very reason, experienced investors have to ask themselves “What’s driving the price up?”

Is the house market similar to the stock market? The UK property crash in the ‘90s was pretty clear: prices can go in reverse.

However, for the time being, there’s no doubt, prices are dramatically going up for the UK residential properties. But why?

Moreover, UK residential properties have increased in value more than 6 times since 1980s, while the commercial estate prices have increased only 2.5 times.

What are the reasons that push the house prices up in the UK?

More people

There are more people in the UK and the population of the UK is predicted to rise from 60 million in 2005, to 62 million in 2011 and nearly 65 million by 2021. Immigration numbers have been underestimated in the past, so the actual numbers might be higher.

More houses required

That’s a no-brainer: more people implies more houses. But there’s another twist to the story. The size of the average English household has fallen steadily from 3.1 in 1961 to 2.29 today. The main driver at the moment is the ageing society. People live longer and share less. People also start a family later in their life and many people live alone.

Not enough houses

UK is not building enough houses to meet the demand to buy or rent. Estimations put the value of the demand for houses at 200,000 or even more each year. The offer is around 140,000-160,000 per year. Due to governmental policies, hardly any council estates were built in the last 20 years. Meanwhile millions of former council homes have been sold by local authorities. All this had the effect of forcing people who might have rented into buying.

Currently the UK builds about 3.1 new houses per year per every thousand of people. In 2002, UK built fewer houses than in 1921. Meanwhile, the rest of the European Union (before the enlargement in 2004) built at a faster rate of 5.1 houses per thousand population. The EU has now 448 dwellings per thousand population, compared to 431 in the UK.

Psychology

The combination of continually increasing house prices, lack of good quality, cheap rentals and the financial gains that home owners have enjoyed in the last decade have left a deep psychological imprint on the UK buyer. There is an urge to get on the property ladder by all means.

Others

Added to the arguments above is the fact that in the UK there are many houses and a bias towards that. Houses are better for control and privacy but take more habitable space than flats.

Also, for a long time, mortgage repayment rates on UK properties have been cheaper than rent.

All these factors contribute substantially to the increase in house prices. At the moment building properties are highly restricted by planning laws. It is much easier for commercial estates to get planning permissions as this is seen as creating jobs and contributing to the local economy.

What can be done about it?

It’s up to the government to change direction in regards to housing. There have been some proposals to relax the planning laws to allow for builders to build more houses in the areas that people want to live in. So far, there has been no desire to act on the problem of houses. As long as that continues, we can safely assume that house prices will continue their way upwards.