Why do house prices go up?

House prices increase when houses aren’t built quickly enough to meet demand. There’s several reasons for why this could be happening: a lack of available land, low government investment, or regulations preventing people from building on green space are a few possibilities.¹ In some cases, when the housing market is controlled by a small number of property developers with a large amount of resources, supply could be intentionally restricted to keep house prices high.²

But what exactly causes demand for houses to rise?

The simplest answer we hear all the time is overpopulation and immigration, but those don’t actually paint a full picture of what’s going on. Because most people can’t afford to buy a home based off savings, they take out a mortgage, or loan, to pay back over a long period of time. In other words, they’re buying their homes with debt. That means that demand for housing is limited only by a bank’s decision of how much money they are willing to lend. As long as banks keep lending, demand can keep rising, as can house prices. This is what’s called the ‘financialization’ of the housing market.

So what determines how much banks will lend? A mixture of things – regulations, how well they think the economy is doing (and therefore how likely they think it is that people will be able to pay back their loans), and how much governmental support is in place for homeowners. Banks generally like lending out mortgages because they are less risky than other types of loans. This is because if a bank lends someone money to buy a house, and a few years down the line they fail to repay, the bank can simply take back the house. The house is what’s called ‘collateral’ for the loan.

We often treat house prices as an inevitable thing which can't be controlled. But when we look at what actually determines house prices, politics seems to play a vital role, through banking regulation, town planning, government investment. And with all political choices, they can be challenged, contested and changed.