Factors that influence the price of houses

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Contents

. Introduction Pg 3

2. How houses are affected by demand and supply Pg 4

3. Inflation Pg 8

4. Consumer Confidence Pg 9

5. Affordability Pg 10

6. Interest Rates Pg 11

7. Average Property Prices in the UK Pg 12

8. Size and Type of Properties Pg 13

9. Economic Growth Pg 14

0. Conclusion Pg 15

Introduction

The question that is to be investigated in this project is 'What factors determine the price of houses?'

I have made a hypothesis from this question that I will later prove or disprove in my investigation. My hypothesis is:

House prices are mainly determined by mortgage rates.

To collect my information I will use a wide range of resources. These will be:

· The Internet, particularly specialised sites dealing in economics (e.g. www.bized.ac.uk,). Also property sites that give information on houses.

· I will try to use as much of my class work as possible. I will need to look at my notes on Demand and Supply.

Also advice and encouragement will also be gained from parents if needed as they have some experience in the house market.

A major resource in this investigation will be looking at the determinants of demand and supply, which will help us when investigating the factors that affect the demand and supply of houses.

How House prices are affected by Demand and Supply

This is the one of the main factors to be considered in this investigation. This project will be greatly influenced by supply and demand and below the laws of supply and demand will be explained and examined to see how it operates with regard to house prices.

* The law of demand states that as the price of a product increases, the demand for that product decreases and as the price decreases, the demand for the product increases. This is an inverse relationship.

Price

P1

D

Q1 Quantity

A change in price never shifts the demand curve for that good. In the diagram below, there is an increase in price, which results in a movement up the demand curve. This causes quantity demanded to fall from Q1 to Q2 which is sometimes called a contraction in demand.

A decrease in price from P2 to P1 results in an increase in quantity demanded from Q2 to Q1 so there is a downward movement along the demand curve. This is sometimes called an extension in demand.

* The law of supply states that as the price of a product increases, the supply of that product also increases and as the price decreases, the supply of the product also decreases. This is a direct relationship.

Price S

P1

D

Q1 Quantity

A change in price never shifts the supply curve for that good. In the diagram below, there is an increase in price, which results in a movement up the supply curve. This causes quantity supplied to increase from Q1 to Q2 which is sometimes called a expansion in supply.

A decrease in price from P2 to P1 results in a decrease in quantity supplied from Q2 to Q1 so there is a downward movement along the demand curve. This is sometimes called a contraction in supply.

This is a supply and demand diagram which shows how an equilibrium market price is determined.

Graph showing the Equilibrium market price

The equilibrium price is the price of a good or service when the quantity demanded is equal to the quantity supplied.

At prices above the equilibrium (P*) there is excess supply while at prices below the equilibrium (P*) there is excess demand. The effect of excess supply is to force the price down, while excess demand creates shortages of goods and services and forces the price up.
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Elasticity

Here are the definitions of price elasticity:

* Price elasticity of demand is the responsiveness of changes in quantity demanded to changes in price.

* Price elasticity of supply is the responsiveness of changes in quantity supplied to changes in price.

They affect the price of houses in certain ways.

Demand for houses is relatively elastic. This means that the demand for houses is relatively responsive to a change in price. This is shown by the diagram below.

Price Elasticity of Demand for Houses

Price

D

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