The Change in the Price of Houses - Essay Example

Use supply and demand economic theory and diagrams to explain why the price of houses has changed so much over the last three years (40 What is your prediction for the next year (10%) A quick glance at the house price graph of UK reveals that there happened a big increase in the price of houses. There is a steady increase in the price since 1960. Investing in properties guarantees a positive return in UK. This increases the demand for houses which in turn makes the price of houses rise. Prices of house in UK are now 7.71 per cent more than the price of the last year. House Sales in England and Wales increased by 24 % compared to the sales rate of 2005. Both sales and price steadily increase in London. Sales show a 26.69% increase resulting a steep rise in the price. Studies show that, in the recent period, more than 33,000 houses were sold in London alone. The number of houses with price more than £1 million rose abruptly. This set of figures of increase in the price and sales of houses reflect the demand and supply theory in economics. More and more people are looking to buy when less people are willing to sell. This results in an increase in price of houses. The market thus exhibits a continuous growth. Almost 1250 properties got sold in 2006 for prices over £1 million. In 2005 less than 725 properties went for more than £1 million. The property market is growing in such a way that buyers are ready to pay heavy prices and higher mortgage rates. In spite of the price increase people buy properties for reaching the property ladder and gain the advantages of continuous growth. The increased demand of properties made the prices rise. The supply and demand economic theory thus proves true in the matter of house prices. Property prices change regularly in UK. Prices have increased by 3% a year in the last three decades. Even though prices are on an increase for long term, in between there happens a sudden fall because of the economic problems. Every 10 years there happens a dramatic fall in the price. For example, in the 1990s, when the nation encountered a recession, the prices decreased. Similarly prices fell in 2008 because of the recession caused by the ‘credit crunch’. Economic problems reduce the purchasing power of people which resulted in a decrease in demand. This brought about a decrease in price. Sometimes certain factors block buyers from buying for a small period of time. This would also result in a decrease of price. The price of house fluctuates dramatically because of few reasons. Economic fluctuations like recession are the chief causes. Confidence in the market, property affordability, and unemployment are few reasons. The chief reason for price increase of properties in UK is high demand because of shortage of properties. There is a big shortage of properties in UK. Even though there is a great demand for properties, not many properties are available for sale. Population is increasing at a big rate. New houses and properties are rarely found. The rising population is struggling to find residence. Moreover here is a big demand for small households. Single and double bedroom houses are of great demand as married people look for separate houses. Aged people also prefer to settle to smaller properties. This rise in demand for houses and non-availability of houses contribute to the price increase. A rise in the price of properties is expected for the next year. The current trend of property prices is expected to continue in the next year. Demand of houses is expected to increase as more and more people are getting married and looking for independent houses. The number of properties available for sale is decreasing. As availability is decreasing and demand is increasing, house prices are rising and it is expected to rise in the next year. When the market demand for houses in a certain area increase and there comes a shortage of properties, the balance of power in the property market moves in favor of sellers. This happens because of the high demand for properties in the market. Sellers can wait to get the best price for their properties. When the demands for houses reduce and there comes large number of properties in the market, the power shifts towards the buyers. This makes the sellers sell their properties for a lower price. A rise in income, a rise in population, a fall or rises in unemployment are few factors that can influence the property market. Explain why fiscal and monetary policy in the UK have changed so much over the last three years (50%) The fiscal and monetary policy of UK has undergone many changes in the recent past. Economic affairs like changes in the interest rates and economic stand of the United States heavily influence the financial state of UK. The fluctuations in the rate of economic activity cause policy changes. There are several unexpected events that initiate changes in the rate of employment, demand and output in the economy. These types of demand-side shocks alter the economy and policies. Certain events cause these demand-side shocks. Capital investment booms can make a big difference. For example, a construction boom that raises the supply of house would cause economic shifts. Investments help to have several new industrial and commercial buildings. Such changes make heavy influences. Monetary and fiscal policies of UK have witnessed considerable change because of economic shifts caused by these events. Increase and decrease in the exchange rate caused several changes in UK economy. Exchange rate differences affected net export demand. It further influenced employment, output, profits and turnovers of businesses related to export industries. Difference in employment level influenced the financial state of the nation. Good employment raised people’s income whose purchasing power heavily influences the nation. Consumer booms in the countries that are chief trading partners of UK influenced the demand of the exports of services and goods. Consumer booms contribute to the fiscal and monetary changes. Boom in the property market affected the economy. Rise and fall of share prices also heavily affected the UK economy. A sudden rise or fall in the interest rates influences the economy which in turn made the fiscal and monetary policy change in UK. Spending power of people is a major factor that influenced the nation’s economy. Profit, income and inflation affect the spending power of people. The expectations of businesses and consumers do have a big influence on the planned spending. For example, increase in consumer incomes, profits from businesses and companies and other rise in income helped firms, companies and households to spend more money. Expected income rise and expected inflation made people spend much during the last three years. Because of an expected inflation, people spent their money before the prices raise come into effect. This affected the economy. As confidence decreased, there happened a saving increase. This encouraged certain companies postpone their capital investment projects. They were afraid of a demand fall and decrease in the expected profit of investments. This made changes in the monetary policy. An expansionary monetary policy made a big difference. The fall of interest rates decreased the cost of borrowing. This increased the consumption. Low interest rates made companies and businesses borrow and invest. Changes in fiscal policies were influenced by government borrowings, government spending, taxation and welfare benefits. For example, government sometimes increased its expenditure. In come tax influenced the disposable income. For example, low income tax rate increase the disposable income. This encouraged consumption. Major economic affairs that happened in the international economy influenced the fiscal and monetary policies of UK. Foreign income and foreign exchanged rates influenced the fiscal policies. For example, the economic cycle in certain countries influence UK economy. A decrease in the value of pound made exports cheaper and imports dearer. This made the exports increase and imports decrease. These events made a heavy influence on the economy. The impact is influenced by the price elasticity of demand for exports and imports. This is also influenced by the elasticity of supply of the exporters with respect to an exchange rate decrease. A rise in overseas income increased the demand for exports. A recession in an export market contributed to a decrease in exports. This also resulted in an inward move of aggregate demand. Economy of UK is an open economy. A major portion of the national output is related to the export of services and goods. Economy of UK was also influenced by the competition from imports. Changes in household wealth also influenced the economy. Wealth is the total value of assets belonged to the consumers, for example, shares and houses. Increase in the price of properties or the value of shares made the consumer’s wealth increase. This encouraged them to borrow finance to increase consumption. Decrease in share prices sometimes caused a decrease of financial wealth and decrease in consumer demand. All these influenced the fiscal and monetary policies of UK. References Ball, L. (1993), ‘What determines the sacrifice ratio?’, National Bureau of Economic Research, Working Paper no. 4306, mimeo. Fischer, S. (1993), ‘The role of macroeconomic factors in growth’, National Bureau of Economic Research, Working Paper no. 4565, mimeo. Friedman, M. (1960), A Program for Monetary Stability, New York: Fordham University Press. Hall, R. E. and Mankiw, N. G. (1993), ‘Nominal income targetting’, National Bureau of Economic Research, Working Paper no. 4439, mimeo. Leeson, R. (1994), ‘A.W.H.Phillips M.B.E. (Military Division)’, Economic Journal, vol. 104, pp. 605–18. Phillips, A. W. (1958), ‘The relationship between unemployment and the rate of change of money wage rates in the United Kingdom, 1861–1957’, Economica, vol. 25, pp. 283–99. Read More