House prices

Why are news agencies so obsessed with covering house prices? News agencies diligently cover actual changes in house prices, projected changes, and how events will affect them. If prices are high, first time buyers are priced out of the market – if prices are low, it’s a disaster for everyone, apparently.

Big spender

Somewhere to live is the biggest purchase most people will make, and since it’s unusual to have that sort of money straight off, houses are usually bought with mortgages. The bank buys the house and retains the title deed, while the person with the mortgage pays back the cost of the house, with interest, for the next 10 to 20 years. For those with them, mortgage repayments usually make up the biggest chunk of the monthly budget. The monthly (or yearly) amount to be repaid can be calculated using the maths of geometric progressions:

c=\large\frac{rP}{1-(1+r)^{-N}}

House pricesWhere P is the total loan amount, r is the interest rate, and N is the number of payments to be made (read more about mortgage repayments ). But at the same time as yearly repayments are being made, interest is being added to the loan amount. This means that to start with, repayments go mainly towards paying off the interest and only a small amount is taken off the original amount borrowed. The following graph shows how much of each year’s payment goes towards paying interest, and how much towards the balance of the loan.

The rate of interest charged on mortgages depends on the specific choice of mortgage, but variable interest is the most common. This takes its value from the interest rate decided by the national banks each year to keep the economy stable.

House prices

The price is never right!

However, the economy also depends on the state of the housing market.

  • Lower interest rates means mortgages ‘cost less’ and encourage more sales
  • In accordance with the law of supply and demand, when more people want to buy houses, the average price of property goes up.
  • This makes homeowners more confident in their investment and in the economy in general, and their spending increases.

But if interest rates are too low, the price of property can rise to be unattainable for first time buyers and those on lower incomes, causing problems for new families and shortages of workers in more expensive areas.

Taking the economy’s temperature

As you might expect, the housing market is tied to the economy in other ways – when unemployment increases, the housing market suffers, as people without jobs cannot get mortgages and probably wouldn’t be able to pay them even if they could. Similarly, healthy house prices encourage the building trade and stimulate job creation.

The combination of huge personal investment in housing – an Englishman’s home is his castle, after all – and a complex web of connections between the housing market and other economic indicators explain why this particular market gets so much attention.

HousePrices3Housework

Economists and government policy advisors need to take the housing market into their calculations, as it is one of the things that can set people against policies. On a day to day basis, estate agents and mortgage advisors need to be familiar with the big picture of housing prices, as well as the close-up details of how individual households will be affected. An understanding of the maths and economic principles involved is needed to do their jobs well, and eventually enable others to own their own home.