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Discuss how far rising house prices are likely to benefit the UK economy

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Introduction

Discuss how far rising house prices are likely to benefit the UK economy. House prices in the UK, by April, were 9.9% more expensive compared to a year ago, according to official figures. This rise in house price is considered by many as beneficial to the economy however this is not entirely true as it does not benefit everyone. Price level S S1 P1 P D1 D Q Q1 Quantity of homes The diagram above shows how the demand and supply for houses can increases the price level. The demand curve, in the diagram, shifts to the right from D to D1 and the supply curve shifts from S to S1. Price level in turn rises from P to P1 which increases the quantity of homes from Q to Q1. Supply increases but no to the extent of demand and therefore the price of homes increases. A reason house prices in the UK have been increasing in the last few years is linked to the supply and demand of homes. ...read more.

Middle

This will have a positive effect on the economy as aggregate demand will increase and in turn so will real gdp leading to actual economic growth. However this increase in real gdp does not mean gdp per capita increase and this true as only the rich or the home owners will benefit from the wealth effect The old, particularly, also benefit from the ability to realize the capital in their house. They can and in retirement often do downsize to a smaller house and use the money realized to fund a more comfortable old age. On the other hand some may argue that the rise in house price is not beneficial to society. The 30 per cent of the population who don't own a house do not, the young and those who overstretch themselves with a mortgage that is too big are all made worse off due to rises in house prices Those too poor to own a house rent either privately or from their local council. ...read more.

Conclusion

When homeowners feel confident that they are sitting on a profit they save less and spend more. High house prices thus fuel consumer spending. The need to calm the housing market is one of the factors the Bank of England's Monetary Policy Committee takes into account when it decides to raise interest rates. And if we were really concerned about rising house prices we could relax planning laws. But that is unlikely to happen. The truth is that rising house prices, for all their downside, make the majority of the population feel good. In conclusion rising house prices can be seen as beneficial as the majority of the population, those who are homeowners, gain confidence which stimulates consumer spending. However the home owners who benefit from to rise in price are generally older whereas the young who are likely to be first time buyers are disadvantaged by this therefore means that the economy cannot achieve one of its macroeconomic objectives of sustainable economic growth as the young who are the next generation are put into a worse situation. ...read more.

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