Demand and Supply - Housing

Question 1

Buying a House is an Investment

Answer 1

1. Houses can rise in value over time and they’re seen as an investment - it’s possible to invest in houses and make a return on the investment in the future.
2. However, a fall in house prices can result in negativity equity - where the value of a property’s mortgage is greater than the property’s market value. This is bad for home owners - what they sell their house for won’t pay off the amount they owe on it. Unless they can pay off the remainder of their mortgage they can’t move house.

Question 2

The supply of Houses is the variety of houses availiable at a given time``

Answer 2

1. The supply of houses is made up of new build and pre-owned houses that are availiable for a range of prices.
2. The supply of new build houses is partially dependent on the costs of building them (including labour, materials, land, and legal and planning costs). The supply also depends on the number and size of building firms and any govt policies that encourage (or discourage) building new houses.
   - An increase in the number of new houses build should lead to a fall in the price of houses. This is shown in the diagram on the right.
   - The supply curve will shift to the right, leading to more houses being supplied at each price, a fall in the equilibrium price and a rise in the equilibrium quantity.
   * LOOK AT DIAGRAM ON PAGE 36*

Question 3

The Price of Housing is determined mainly by Demand Factors

Answer 3

1. The state of the economy has a big impact on the housing market - in areas of high unemployment houses have lower prices and lower demand, but areas with low unemployment tend to have high demand and high house prices.
2. Economic growth, high levels of consumer confidence and high living standards increase demand for housing.
3. The substitute for buying a house is renting one. A fall in the cost of renting may decrease the demand to buy houses, but falling rents could reduce supply of properties for rent if landlords are unwilling to offer low rents.
4. Most properties are bought using a mortgage, so if, for example, interest rates rise, the cost of a mortgage will increase and reduce the demand for house purchases.

Question 4

Short Run PED and PES for housing are Inelastic

Answer 4

1. There are no close substitutes for housing. This means the price elasticity of demand is inelastic - so a rise in price causes a smaller reduction in demand.
2. The price elasticity of supply is inelastic too. The supply of houses can’t be quickly increased because it takes time to build new houses. Supply can also be restricted by the availiabilty of building materials, construction workers and suitable land, and by govt regulations.
3. Because supply can’t increase much in the short run, an increase in demand can make prices rise sharply.

Question 5

House Prices may have knock-on effects

Answer 5

1. If house prices rise and lots of houses are bought and sold, then this might create more jobs in the construction industry.
2. Higher house prices increase the value of ppl’s assets and can increase consumer confidence - this confidence can encourage spending and increase investment
3. Increased house sales encourage spending on furniture, decorating and other household goods.