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What moves house prices

It is worth separating two questions that usually get one answer. Why is housing expensive here rather than there is a question about levels, and it is answered by land, jobs and constraint. Why did prices move this year is a question about changes, and it is usually answered by the cost of borrowing.

The cost of borrowing

Most houses are bought with borrowed money, so the price a household can offer is largely the price a lender will support. When rates fall, a given monthly payment buys a larger loan; when they rise, it buys a smaller one. Because the stock cannot expand in response, that change in capacity feeds through to what buyers bid rather than to how much housing gets built.

The effect is not symmetrical in the short run. When borrowing costs rise sharply, sellers frequently withdraw rather than accept less, so volumes fall before prices do. A market can be described as flat for a year while almost nothing is trading — which is an absence of evidence rather than evidence of stability.

Incomes and employment

Over long periods, prices track what local households earn, because in the end payments come out of income. Where the two diverge for years at a time, something else is usually supplying the difference: buyers whose income is earned elsewhere, second homes, inherited capital, or investors buying for rent.

The composition of employment matters as much as its level. A town whose jobs are concentrated in one industry has a housing market with one point of failure. A town with a hospital, a college, a distribution corridor and a set of small employers has a demand base that does not all move at once.

Supply, and how slowly it arrives

New building responds to price with a delay measured in years: land assembly, permission, servicing, then construction. By the time supply arrives, the conditions that called it forth may have gone. This lag is one reason housing markets overshoot in both directions.

Constraint sets how much of a demand increase can become supply at all. Slope, floodplain, water and sewer capacity, protected land, minimum lot size and municipal boundaries each put a ceiling on what a place can add. Where the ceiling is low, demand shows up entirely in price.

Location, in its components

Location is usually treated as a single mysterious factor. It is not. It decomposes into travel time to work, the quality and boundaries of school catchments, exposure to noise and traffic, flood risk, the age and coherence of the surrounding stock, and the presence of things people walk to.

Each component can be observed separately and each moves separately. A new interchange changes travel time. A boundary redrawn changes a catchment. A watercourse remapped changes insurance and therefore the payment. Prices on two sides of an invisible line can differ substantially and durably for exactly these reasons.

Seasonality and sentiment

Housing has a strong seasonal rhythm in most temperate places: listings and completions cluster around the school year, and midwinter markets are thin. Thin markets produce noisy averages, so a quarter-on-quarter comparison across a seasonal boundary often measures the calendar rather than the market.

Sentiment is real but usually secondary. It moves the willingness to list and to bid, which changes volumes quickly and prices slowly. Where sentiment matters most is at the margin of a chain: one household deciding to wait can stall four transactions.