An Investigation Into the Causes of Rising House Prices in the UK.

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An Investigation Into the Causes of Rising House Prices in the UK

Aim: To discover why house prices have risen in recent years.

Hypothesis: There has been a rise in house prices in the UK in recent years. I think it is mainly due to a rise in real income. Real income is income of an individual, organization, or country, after taking into consideration the effects of inflation on purchasing power. A rise in real income means the consumer has more purchasing power when they come to purchasing a house. This will cause an increase in demand and therefore the demand curve will shift to the left giving a new, higher equilibrium price and quantity.

What Determines House Prices and Why Might They Change? …Page 1

Investigating House Prices …Page 2

What has caused this Rise in House Prices? …Page 4

Conclusion …Page 7

Evaluation …Page 7

Bibliography …Page 8

Word Count:  2148


What Determines House Prices and Why Might They Change?

To understand why the price of houses has changed we need to understand what determines the price of a good. The price of a good is determined by the interaction of the demand and supply conditions. As the graph below shows, there is an equilibrium price and quantity where the supply and demand curves cross. This shows that the price is determined by supply and demand and can be changed when one of these change.

The factors of demand are:

  • the price of the good;
  • the income of consumers;
  • the demand for alternative goods which could be used (substitutes);
  • the demand for goods used at the same time (complements);
  • whether people like the good (consumer taste).

The factors that determine supply are:

  •  the price of the good;
  • the cost of making the good;
  • the supply of alternative goods the producer could make with the same resources (competitive supply);
  • the supply of goods actually produced at the same time (joint supply);
  • unexpected events that affect supply, e.g. natural disasters.

A change in household income will affect the price of housing. If a households income rises they will have more buying power when it comes to purchasing a house. This will cause a change in demand and a subsequent change in supply and a new equilibrium price.

The price of substitutes may affect the price of housing. For example, the price of renting.

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Tastes and fashion may play an important roll at the time. They can affect whether people buy or rent.

The cost of land will also affect the price of housing. The lower cost represents lower costs of production; this will increase profitability, so attracting more producers into the market.

The reduction in economic output of other sectors will influence the supply of housing. The relationship between economic output of other sectors and the supply of housing is that they are in composite demand. For instance, the fall in output of other sectors means that there is more available land ...

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