Using Demand and Supply Analysis Identify Those Factors Which You Think Have Been Important in Affecting House Prices in the Uk over the Past Five Years or so.

999 Words Mar 26th, 2011 4 Pages
Introduction
Over the past five years or so, house prices in the UK have been constantly changing. At times, house prices being on a rapid increase and at other times falling. This leads to a possibility of negative house equity. As per Sloman and Garratt: “negative house equity is whereby the outstanding value of a mortgage is greater than the value of property against which it is secured.” (Text Book) Supply and demand are the main determinants of house prices, as the equilibrium of house prices will fall if demand rises and supply falls. An important characteristic of UK house prices identified from the UK house price inflation chart is the tendency of prices to rise over the long term, more quickly than incomes and consumer prices.
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“However, during the credit crunch of 2008, the number of mortgage products on offer fell due to a shortage of finance in the money markets.” (First website) The mortgage approvals graph shows the drastic decline in approvals from mid 2007 until 2009. When the recession hit, around 40,000 less mortgage approvals were made since the ‘economic boom’. This lead to its lowest house prices yet. These were falling at an annual rate of above 15%, as shown in the house price % change graph.
Speculation
Not only mortgages and incomes affected the 2008 house price drop but speculation was a strong factor as well. Around 2008, when house prices were falling, people resisted from buying houses thinking that they should wait until prices decreased even more. Those selling their houses tried desperately to sell as soon as possible before the value of their houses decreased further. This speculation that house prices would continue to fall influenced house price movements in the direction that people had predicted. This speculation aggravated a fall in house prices as supply was higher than demand leading to an increase in the equilibrium of house prices.
Consumer Confidence
Consumer confidence plays a role in the housing sector. Similar to speculation, when people speculate the future performance of the economy they may feel less confident in buying or selling houses dependant on whether economy is deteriorating or rising. “Improved

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