ECONOMICS FOR BUSINESS

Economics for business



Economics for business

Question 1a

Discuss the factors that led to the decline in the rate of house price rises after January 2008. What happened (according to this measure of house prices) between June and July 2008? How long (in months) were UK house prices falling? When did house prices in the UK begin to rise again?

1a)Factors Reducing House Prices

After January 2008, the change in prices of houses in the United Kingdom experienced a steep decline. Although there can be numerous factors that led to this behaviour of house prices, some of them are discussed below. (UK House Prices)

Demand for houses was very weak, which resulted in buyers being far less than the sellers (High supply and Low demand).

At higher end of the market, distressed selling has become common.

As parents die or move to sheltered accommodations, Baby boomers and inheritance generations are selling their parents' houses.

Decreased consumer confidence and the financial squeeze have dispersed buyers.

Mortgage regulations, like ending interests only mortgage, makes it difficult to get mortgages.

Considerable space is still unoccupied as new property is available in the market

Buy to let investments have decreased

Sizeable deposits prevent first time buyers as they have lesser savings and confidence.

The housing market seems to be nervous overall. (UK House Prices)

The prices in June 2008, between 1st to 30th June 2008, increased only slightly. However, as time progressed to July 2008, the prices became stagnant. By the end of July 2008, house prices were on a decline of about 3%. Collectively, the prices declined in the period June to July 2008.

The house prices were falling for a period of about 16 months from the start of July 2008 until the end of October 2009.

The house prices started to rise as November progressed, precisely by the end of the first week of November 2009.

Question 1b

Over the coming year, which factors are likely to affect

(a)demand for houses,

(b)supply of houses,

(c)house prices?

1b)House prices in the UK are affected by a combination of demand and supply factors.

Demand Side Factors:

Interest Rates - cost of paying mortgages are affected

Consumer Confidence - high consumer confidence means more people willing to take risky mortgage to buy house

Mortgage Finance Availability - Enables people to utilize the options provided by banks of buying houses.

Demographical Factor - Increased divorce rate, net immigrants, more old single people, less marriages and children leaving home early (Factors that Affect House Prices in UK)

 

Supply side Factors

Availability of planning permission

Opportunity cost - builders find better returns on other investments

Demolition - houses demolished as they are not suitable to for living (Factors that Affect House Prices in UK)

House Prices

Speculation - investors buy house for capital gain and renting income

High building cost - means low supply of houses resulting in increased prices

Economic Growth - rising incomes motivate public to spend more

Unemployment - lower the unemployment higher the demand for houses (Factors that Affect House Prices in UK)

Question 2

Consider the following data on the price and sales of souvenir T-shirts for August each year at the Tower of London, according to ...