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An investigation into the causes of rising house prices in the UK.

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Economics coursework An investigation into the causes of rising house prices in the UK. By James Keane Contents Page Aim, Hypothesis and economic theory -3- House prices over the last 5 years -4- Real Income and its effect on the housing market -4- GDP and its effect on the housing market -4- & -5- The relationship between income and mortgage lending -5- & -6- Population and its effect on the housing market -6- Divorce and its effect on the housing market -6- Interest rates -7- Sale of council houses -8- Factors of Production -8- Conclusion -9- Bibliography -10- Aim: to discover why house prices have risen in recent years Hypothesis: I think that rising house prices inn the UK is mainly due to interest rates falling consistently. The forces of Supply and Demand determine the prices of houses. If there is a decrease in demand or an increase in supply, it will mean that prices will fall. If there is an increase in demand or a decrease in supply then the prices will rise. Price determination can be shown in a supply and demand diagram. Price (�) of Houses 225,000 Supply 150,000 75,000 Demand 100 200 300 400 Quantity Demanded and supplied When the price is at 75,000 the demand will be at 350, however the supply will be only 125, which will result in an excess of demand. When the price is at 225,000 the demand will be at 150, but the supply will be at 375, which will result in an excess of supply. ...read more.


the table, it shows us that the GDP, for the time we are looking at (1997-2001), has increased, on average, by 2.4% per year. Gross Domestic Product is the value of all the goods and services produced over a period of time within a country. When the GDP goes up, it results in firms having more money, so because the firms have more money they can afford to pay higher wages. The link, between the two, is that when GDP goes up so does incomes as proven in the table. Increased incomes leads to increased demand for houses. The link between incomes and mortgage lending To buy a house you normally need to borrow money by taking out a mortgage. The amount of money you can take out is determined by the mortgage-income multiple. This is a multiple of someone's annual income. Therefore, if incomes increase, which they have been, the amount of money someone can borrow is higher and demand for houses is increased. Population size People need places to live, so if there are more people there will more demand for places to live, this is shown in the table. It is not only the population size that affects house prices, it is also its composition. In the 21st Century, people want to move away from the city centres and move into the suburbs, with a lot of people wanting to do this it will increase prices for houses in these areas. ...read more.


Although it is an important factor in the price of houses, it is not the most important because it depends on affordability and the mortgage repayment against income. Population has weak relevance to house prices because the population has been increasing slowly over the last 5 years and if there was a strong link between house prices and population then house prices would be rising slowly as well. Tastes and fashions is considerably important because it includes the factor of the number of people living in a house. This number of people living in a house has decreased due to divorces. The most relative condition of demand is the price and availability of credit. This is because the mortgage rates can decide if someone buys a house or not, for example if the repayments are too high and not affordable the person will not take out a mortgage and not buy a house. Also the interest rate can decide on whether people spend money or save it. To a certain extent, my hypothesis was correct, although that is not the only reason why house prices have been rising. House prices have risen due to number of reasons, such as changes in real income, population size, price of renting accommodation and mortgage rates. I could have improved my investigation in many ways. I was unable to attain information about the cost of renting accommodation, I rang several estate agents but they could not provide the information. I also could not find figures for the sale of council flats or the number of new houses built in the time. ...read more.

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