The dissertation aims to find the determinants of house prices in the UK from 1980 to 2008.
It also seeks the relationship between house prices and fundamental factors such as: real disposable income, interest rates, unemployment rates, and population, and to find out whether there was a price bubble in the housing market during that period. Understanding the determinants of house prices is very important as expenditure on new homes is a key component of consumption and aggregate demand and the house is the major asset for most households. Collapse in house markets may lead to economic crisis as has just happened in the USA. There are many previous studies which have tried to explain the relationship between house prices and fundamental factors in many countries such as: the USA, Central and Eastern Europe, Australia. They found that some fundamental factors have significant impact on house prices whilst some do not. Moreover, the sign and significance of the relationship would be different depending on country, method, economic circumstance and period of time. This dissertation tries to explore the factors that affect UK house prices, the significance and the sign of their relationship in the period 1980-2008. Literature review: Gert, B. and Mihaljek, D. (2007) Determinants of House Prices in Central and Eastern Europe. Comparative Economic Studies. vol. 49, iss. 3, pp 367-389 This study, which has the same main goal as my dissertation, used the quantitative method to find the relationship between house prices and fundamental factors such as: disposable income, interest rates, housing credit, demographic factors and financial institution, housing quality. The study suggested that house prices are modelled by the basic theory of demand and supply. The key factors that determine the demand for housing are house prices, disposable income, demographic and labour market factors, the expected rate of return on housing, housing quality and other demand shifters. Financial regulation and growth of bank credit also play a role in affecting house prices, which was reflected by a housing boom in the late 1980s in the period of financial liberalisation in the UK. On the other hand, supply of housing is a function of house price, as is the real cost of construction.From these two equations, the function of house prices will be detectible. However, the article suggests that house prices fluctuate significantly due to the variation of demand and supply side factors and key elasticities tend to be higher in small countries than in large ones. In order to find the relationship
