What has led to this sudden inflation of real estate values?



Reasons for the Increase in Property Prices

A very easy explanation for this phenomenon is that rise or fall in prices adheres to the economic principles of demand and supply.

Increased demand for houses is the result of an increased population generated by a wave of immigrants touching the shores of the UK, from Eastern Europe. The population of London was 2.4 million in 1975. This figure is expected to touch 3.1 million by 2013.

However, this is not the only factor leading to increased demand. Many landlords are increasing their ?buy to let? holdings for meeting the lodging requirements of Eastern Europe immigrants (many immigrants are from Poland.)

The large demand is unmet by equivalent supply. Newly constructed houses have just met 0.5% of the housing sector demand. Constraint of land is preventing further construction of houses.

Though important, demand and supply are not the only determining factors for price rise. This upward spiralling of prices is a result of many complex factors at work. Other factors like increase in employment rates, increase in income, increased GDP, future optimistic growth rates are all responsible for this steep hike. In other words, economic progress is also responsible for the boom in property prices.

And finally, property speculators are also playing their part well.

Consequences of this Rising Property Prices

Peculiar and unexpected repercussions of these galloping prices have been the creation of a new class of rich and poor. Landless people or non-property owners are the new class of poor in Britain while, the house owners are turning richer by the day.

A decade or two back an average incomer purchased a house with money equal to two times his annual income. But the increased prices have entirely changed the scenario. The current average wage earner has to spend 30 times more than his annual income on a house purchase.

This means the new generation of first-time house owners has to take huge mortgages, repay heavier instalments for longer durations.

Houses have thus become high-yield investments. They no longer signify a home, where people lovingly reside, raise families and live happily. It has also given rise to a new class of desperate speculators struggling to join this get-rich-quick bandwagon.

The property market is now bereft of first-time purchasers. The younger generation (people aged in their late 20s) are no longer able to afford a house. These first-time prospective buyers have been forcibly converted to turn tenants.

Increase in the Number of Tenants in the UK

This has given rise to a new breed of tenants. They have quantitatively and qualitatively swelled the rental market. Well-educated professional tenants need quality for the rent they pay. They no longer accept shabby and outdated exteriors or poorly done up interiors. Luxuries have now turned necessities.

An increasing number of tenants are driving up the rent, especially for properties that lie in close proximity to schools and those that are well-linked by varied means of transport.

Thus, the increasing population is set to further drive up the short-term price rise. The leaders of price hike are expected to be Scotland and Northern Ireland though London would be the city with the maximum rate of growth in prices. And property prices in central London are believed to experience a double-digit growth.

The real estate price hike is slowly altering class concepts in the UK. However, continuous growth is never a possibility. A 30 to 40% fall in prices is predicted by many. After this healthy and much required correction, the increase will continue unabated for time to come. Each fresh rise will bring in new changes in society.