With reference to specific examples, what determines the price of a house?

AS and A Level Business Studies

GCSE Economics Coursework

By Tom Nixon 11BD

In this economics, I will be explaining what determines the price of a house with reference to:

Demand and supply;
Size, facilities and age of a house;
Local location and the surrounding area, and;
Cities, suburbs and the country

Introduction

Demand is the willingness and ability to buy a good or service at any given price.

At price p, the quantity bought is q.

However, if price increases from p to p1, the quantity sold decreases from q to q1.

However, if the price falls from p to p1,

then the quantity demanded will increase from

q to q1

Supply is the willingness and ability to sell a good or service at any given price.

At price p, quantity q is sold.

If price increases from p to p1 then quantity supplied also increases from q to q1.

If price falls though, from p to p1,

then the quantity supplied will also

decrease from q to q1

as suppliers are more willing to

sell products at a higher price.

Hypothesis

I predict that the price of a house is mainly determined by the demand for a house along with the cost of producing a house. If it costs £50, 000 to build a house then the supplier will be looking to maximise his profit and sell it for at least double what it cost to build it originally.

However, if lots of people are in demand for houses then the price will go down. Therefore, we can assume that demand for houses is price inelastic, and the demand curve should be something like this:

I think that house prices are determined by demand. If people demand lots of houses then there will be low costs, but prices are so high due to not many people wanting houses. I think that people do not want houses because inflation is high and mortgage rates are high too so this has ...

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I also predict that I will find that as the size of a house increases, so does its price, as it will cost more to build. In relation to this, houses that are old, I believe will be more expensive than newer houses because old houses have period features, which are quite desirable.

I also predict that houses in the inner city, with the exception of London will be cheaper than houses in the country because people have previously moved to the city from the countryside in search of work and now the cities are becoming too crowded and people are starting to migrate from urban areas to rural areas and the demand for houses in the country will be starting to rise.

If there are few houses available in a location where there is high demand then I predict that the price will increase because people will compete with each other in order to buy a house in a sought after area. An example of an area like this would be London.

I predict that houses in ideal locations will be more expensive than houses near to undesirable features, for example airports, as there is low demand for houses near to them, therefore we can assume that the price will be relatively low also.

Size, Facilities and Age Of A House

Below is a table of house prices for different types of houses with different facilities in Caterham. The average price for a dwelling in Caterham is in the region of £235, 000 - £245, 000.

As we can see, as the facilities and the size of the houses increase, so does the price. This is because a five bedroom detached house costs more to build and also it is a luxury to have a very big house therefore if it was very cheap people may question the quality. Also, a converted 3-bedroom townhouse is quite expensive because of its age. It will have period features not seen in buildings built nowadays and as it is uncommon yet desirable, demand is high and therefore price is.

Local Location and Surrounding Areas

If a house is near to the railway station or a school then it is very convenient for travelling, education or whatever it may be. But convenience comes at a price because people will want to buy the house because convenience appeals to people, so the price of the house will be high.

However, if a house is built near to an airport, there is lots of noise pollution and a high traffic density so this will put buyers off and as there is not much demand then the price will be relatively low.

Cities, Suburbs and the Country

Houses in the cities tend to be expensive because they are ideally located for work and other amenities.

But, cities are overcrowded and there is a problem with supplying housing for the increasing population because previously people moved from the rural areas to urban areas in search of work.

However, people are now starting to move to the countryside where there is a demand for houses and prices are not so high as in the city.

Commuters, commuting to work everyday live in the suburbs. For example East Croydon is the busiest train station in Britain for commuters starting off their journey to work.

Mortgage Rates

A mortgage is a loan to buy a house. You pay the loan over a period of time with interest. As interest rates increase, the demand for housing will go down as buying a house is less desirable if mortgage rates are high. Thus people will wait a while before buying when the mortgage rates are low. Then they think that they can afford more and buy bigger houses which lead to rising house prices and a spiralling economy.

Conclusions

From the explanation, I think that the biggest factor in determining the price of a house overall is mortgage rates. If demand is high for housing, then the price should be low, according to the demand curve.

However, if mortgage rates are high then demand is low and vice versa.

I did not predict that mortgage rates would be the main factor in determining the price of a house but I think that my conclusions have matched my hypothesis to a certain extent because the location of a house will not determine its price if you look at it from the wider picture. However, when you look at house prices in specific areas, then the location becomes a main factor.

I believe my evidence and material that I used to be quite reliable. Although my evidence for house prices in Caterham were not averages so anyone of the prices could be an anomaly but the prices reflected what I had previously predicted.