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

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Introduction

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). ...read more.

Middle

In this graph we can see that over the past thirty years real income has risen by over double. But over the past ten years the GDP has started to move away from household income and especially in the past 3 or 4 years household income has increased dramatically which relates to the rapid increase of house prices in the past 3 years. This could be one reason why house prices have risen. Because people have a higher income therefore more purchasing power and this may start a price shift in the market. The higher income means there will be an increase in demand and subsequently an extension of supply. In result, a new and higher equilibrium price is created. If a household has a higher income then mortgage lenders will offer a higher mortgage equalling in that household have more purchasing power, this is to do with the mortgage-income multiple. As part of my investigation I inquired at a bank about the mortgage-income multiple. The mortgage-income multiple is where your income is times by a number around 2 or 3 giving the amount u will receive as a mortgage so consequently the higher your income, the more money you will receive as a mortgage and be able to spend on a house. Therefore again the demand for housing will increase with an extension of supply, causing a new equilibrium price and quantity. From the Social Trends publication on www.statistics.gov.uk I can see that over the past 50 years population has grown by 17% (8.6million) ...read more.

Conclusion

An increase in real income, increase in population, low interest rates, increase in the price of land and tighter government building regulations all have contributed to an overall rise in the housing market. In my hypothesis I said the rise in house prices has been mainly due to the increase in real income, which appeared to be true. The rise in income relates most to how much money people will have to spend on housing and therefore cause an increase in demand for it. In the last 3 or 4 years real income has increased dramatically and in the last 3 years houses prices have risen the most suggesting that real income is one of the biggest causes of rising house prices. A subsequent extension of supply will follow this increase in demand and create a new, higher, equilibrium price. Evaluation Looking at the house prices over the past ten years was a good period of time because you can see how they have changed dramatically but not too far back to get confused with different periods when other factors caused the prices to rise and fall. I think my investigation went how I expected it to go. The hypothesis was fairly accurate and nothing that I found out during the investigation seemed to go against it and suggest a reason why house prices could be falling. If I were to improve my investigation I think I would look further into tastes and fashion, for example, buying to rent because I think this also is a big influence on the rising prices of houses. ...read more.

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