Why Do House Prices Vary So Much ?

It’s the big question that everyone in property – buyers, sellers, investors and agents alike – would like to know the answer to. (But may be afraid to ask!)

Why do house prices vary so much in different parts of the country? Why is property in some places so vastly expensive but in other places so cheap by comparison?

For example, why does a two bedroomed house in London have an average price around £855,000 but in Newcastle upon Tyne just £143,000 ? (Latest figures from Home.co.uk)

Exactly how and why can there be so much difference in the value of property just depending on where it is located?

Here are a few thoughts on why:

Firstly, a few thoughts on what doesn’t explain the different value of property in different areas!

Construction costs. It’s not down to construction costs. The cost of building materials are pretty much the same across the country. Labour may be a little more expensive in some places, but not by all that much.

Quality of area. It’s not because some areas are ‘nicer’ than others. Although interestingly many people often think this is why property is more expensive in some areas than others.

Is Greater London (average price £1.1 million) a nicer place to live in than the Lake District (average price around £274,000)? Answer: Probably not!

Supply. It is partly due to the fact that some areas have much higher housing supply than others. For example many parts of the north and Midlands are cheaper because of the large amount of housing which was built for industrial workers in the past. Some areas have a lot of ex-local authority housing which tends to be at the cheaper end of the price range.

Demand. It is partly due to the fact there is more demand. There are just more people in some parts of the country. For example, the population of the South East is around 9.1 million while the population of the North East is only around 2.6 million.

International buyers add to the supply and demand balance. They tend to focus mainly on London and completely overlook other locations.

Lower supply and higher demand pushes prices up and vice versa.

Perception. Perception is part of the equation too. If people believe property in a particular area is and always will be in short supply and prices are rising it will tend to push up demand, and vice versa. Many buyers assume houses in already-expensive areas are better buys or better investments, and vice versa, even though they may not be.

Land costs and availability. There’s a huge difference in land costs in different parts of the country. Land costs affect the value of existing houses and not only new build ones.

According to this report an acre of land in the UK typically costs around £300,000 in the north while exceeding £1 million in the south.

In some places there is very little or even no land for housebuilders to buy. It has all been built on already or its owners don’t want to sell it. In other places there is land but it is difficult or impossible to get permission to build on it.

Cities are often surrounded by green belt land which restricts supply but ironically cities are where more people want to buy.

House size. The size of the houses in a particular area is an often-neglected factor in what determines the wide variation in house prices. Some areas have a lot of large houses which will push the average price of a house there up. The north and Midlands have a lot of two bedroomed terrace properties. The south east has a lot of 3-4 bedroomed suburban houses.

In some cases, oddly, an area with a lot of large houses might actually be cheaper per square metre than an area with a lot of small properties although the average price per house suggests the opposite.

Wages and salaries. People in some areas can afford to pay more. Some areas have more jobs and more better paid jobs. Because mortgages are based on a multiple of income people in higher income areas can afford to pay more exponentially.

The average salary in London is almost £40,000. In the North East it is around £27,500.

Demographics. Demographics are also a factor. Some areas have more young people who are often first time buyers and so on tighter budgets. Some areas have more families. These buyers are likely to be a couple possibly with a double income and much more likely to have equity in a house they already own to use towards their next one.

In short there is no simple answer as to why identical houses are so expensive in some places but relatively cheap in comparison in others. It is down to a combination of different factors. However, knowing and understanding some of the reasons might help us to understand the property market better. (And even make better buying or investment decisions!)

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