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Economics HL Demand of Housing

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Introduction

Name: Rishabh Bhatia Class: 12T2 Teacher: Mr. Stevens Commentary Number: 1 Date Submitted: 6/1/2010 Source of article: http://news.bbc.co.uk/2/hi/business/8247859.stm Article title: House Prices rose by 0.8% in August compared with July - the second monthly rise in a row, says Halifax Date of article: 10/9/2009 Date accessed article: 28/11/2009 Section of syllabus linked to commentary: Demand and Supply Word count of commentary: 749 (including diagrams) http://news.bbc.co.uk/2/hi/business/8247859.stm 10th September 2009 House prices rose by 0.8% in August compared with July - the second monthly rise in a row, says the Halifax. Property values were 10.1% lower in the three months to August compared with the same period a year ago, the survey found. The average UK home was now valued at �160,973, said the Halifax, now part of the Lloyds Banking Group. A lack of supply and greater demand for homes has pushed up prices in recent times, various surveys suggest. "Demand for housing has increased since the start of the year due to better affordability and low interest rates," said Halifax housing economist Martin Ellis. Survey The survey showed that the monthly change in prices had been upwards in four of the first eight months of 2009. Prices in the three months to August compared with the previous three months were 1.7% higher, the biggest rise in this measure since July 2007. ...read more.

Middle

David Smith, of property consultants Carter Jonas, said: "Higher interest rates, when they do come, will result in fewer buyers, which will reduce demand and once again apply downward pressure on prices. The combination of increased supply and reduced demand could catch a lot of people out in 2010." On Thursday, one of the UK's largest housebuilders, Redrow, reported that its sales fell by 54% to �301.8m in the year to the end of June as it sold fewer homes - and those which were bought fetched lower prices. This article shows a rise of 0.8% in the prices of houses available on the UK market, between July and August. Price elasticity of demand (PED) is the responsiveness of quantity demand to a change in price. Factors affecting PED are availability of substitutes and type of good (need or want). In this case, there are no substitutes for the "average UK home" so all forms of housing have been accounted. Generally when a good/service has no substitutes it is inelastic, depending on its importance, because consumers have no choice. Similarly, housing is a necessity, people need a form of shelter - therefore consumers will pay extra money if there are no alternatives. Both these factors are long term because any new forms of housing will be added into the average UK home statistics. ...read more.

Conclusion

The laws of demand state that a consumer will demand more as the prices decrease. This can be seen from this article as demand increased when the average cost of a house decreased - lower interest rates mean that the overall cost of buying a house has decreased. They also state that at a lower price more people can afford to buy the good, as corroborated by the article. The biggest advantage of the price rise in the long run is the wealth effect - an increase in spending that accompanies an increase in perceived wealth. When consumers hear about their house value increasing, they will perceive their wealth to have increased and spend more. This will boost the economy by increasing demand, output and employment - three important factors for growth. It also gives incentive to constructors to build more homes in the hope of increased profits, thus generating even more jobs. Furthermore, increased consumption would cause demand-pull inflation (persistent increase in the average price level in the economy), which in this case is beneficial because UK has continually experienced deflation during the recession. However, a disadvantage of the price is the asset price bubble - it may cause the price of housing to increase further generating more speculation. This may continue till prices are high, then the bubble will burst causing prices to fall - leading to losses for builders and homeowners. However, rents would fall as well, which is better for tenants. ...read more.

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