House prices are determined by a number of different factors. Firstly there are ‘economic fundamentals’ these are factors such as economic growth and the level of average incomes. However, in addition to the basic economic reasons, house prices are often quite volatile because other factors influence the level of house prices. In the UK and US we have seen the importance of speculation and investment in the housing market. This has caused house prices to rise more rapidly than incomes.
Also in recent years, the availability of mortgage finance has played an increasing role in influencing house prices. When mortgage companies are keen to lend a range of unconventional mortgages demand for housing will rise. But, in a credit crunch mortgage products are withdrawn leading to lower demand.
For more detailed analysis see: Factors that determine house prices
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