Level of economic activity/Consumer confidence-Consumer confidence is vital in the housing sector. If expectations of future performance of economy deter ate and people become less optimistic about their own financial circumstances they are tempted to curtail they search for a new home or delay entry to the owner occupied sector. This will see constructionline and other building and construction industries halt their supply and see a loss in profit.
Consumer confidence is low, demand falls from d-d1 and supply falls from s-s1. Which reduces quantity from q1-q2 and price remains the same.
Equally when economy is enjoying sustained growth and rising prosperity- improved confidence raises the number of home buyers and shifts the balance of home power in the market towards the seller if properties are in short supply. This benefits Construction industries as demand is great and supply is able to meet demand.
Level of rents- Rents are paid monthly or yearly for a property which is owned by another. If rent prices are low, consumers would find it easier to rent for lower cost than buy a house. The cross price elasticity between renting and buying a house is high for rent if only renting is cheaper than buying a house, therefore the cross price elasticity for houses is low as more people would prefer to rent than buy.
However if rents are raised and consumers were paying lots of money to rent then in the long run they would be better of buying a house, Cross price elasticity now favours buying a house as in the long run bills for renting would add up to total sum needed to buy a house. Low rents would see constructionline and other construction industries without work as there would be people renting rather than buying, however if rents increased constructionline would have to increase supply to meet demand.
Interest rates- Value of money, the rates of interest you pay on top of what you receive. Buying a house most people tend to take out loans or mortgages. If interest rates were high the value of money would be more expensive therefore people will be unable to get a mortgage, this will mean people would not buy houses and demand would fall resulting in loss of profit for construction industries.
Expectations of future price increases- Expectations of future price increases would endure panic for those potential house buyers. This would encourage those without a house to buy as future prices would increase. This would benefit constructionline and other construction industries as those in need of home would buy before more increase in price.
Expectations of future price increase would increase demand from d-d1 and construction industries would increase supply from s-s1 and quantity would increase from q1-q2, which would see price remain the same.
Ratio of income to house prices- If ratio of income lower than house prices then consumers would find it hard to own a house. This would result in fewer home owners and less of a need for constructionline to supply. However if ratio was greater than hose prices consumers would earn more than what is needed to own a house, this would increase demand and supply of houses.
Determinants of supply for houses
Price- The amount of price suppliers are willing to accept to supply from what is demanded. In this case what construction industries are willing to except to build houses. If price is too low then suppliers will not be willing to supply as they would not make as much profit margin, this will result in constructionline and other construction industries without work and jeopardise their future profitability.
Prices too low constructionline and other construction industries would fail to supply for that price which will result in loss of supply from s-s1 which will see a fall in quantity produced from q1-q2. However price remains the same.
Equally if prices and profitable for builders, then counstructionline would meet supply with demand which would increase their profits in the short run and long run.
Price of land- Price of land is very important, because land is a scarce resource and cannot be produced or created. Therefore the price incurs the most important factor to suppliers. If land is cheap then suppliers will be easily able to purchase and begin constructing houses, however if land is expensive suppliers will find it hard to purchase the land.
Cost of building material- Building material is required in order for houses to be built. The more the material costs the more suppliers will charge and the more the costs will add up to total costs of house. However if costs of building material decrease then suppliers will charge less and cost of house will be less. Constructionline will supply more, if costs of building material is cheap and vice versa.
Cost of building materials increase, the supply will fall from s-s1 and quantity will fall from q1-q2 leading to an increase in price from p1-p2.
Other determinants of demand
Number and price of substitute goods-The substitute of owning a house would be to rent. If rent was cheaper than buying a house, most people would rent. However if rent added up to the total value of the house after a number of years, then it’s better off buying a house. If substitute for house, renting, decreased in price then constructionline would fall in supply and risk profitability in the long run, equally if renting increased this would increase demand of houses and demand for construction industries.
Number and price of complimentary goods- complimentary goods are pair of goods consumed together. For houses, electricity could be a good example of a complimentary product. If price of electricity increased then the demand for houses would also fall, if electricity was very cheap the demand for electricity would increase and so would demand for houses resulting in construction industries increasing supply and profiting in the future.
An increase in price of electricity would entail fall in demand for houses from d-d1 which would decrease price from p1-p2 and fall in quantity from q1-q2.
A decrease in price of electricity would increase demand for houses from d-d1 which would see price rise from P1-P2 and quantity increase from Q1-Q2.
Other determinants of supply
Nature random shocks- Weather, disease, affecting supply of raw material, breakdown of machinery, industrial disputes, earthquakes, flood, fire,etc. would decrease demand and decrease supply and profits for construction industries would fall and see loss in profit as there would be limited demand and shortage of supply.
Market structure-
Market structure refers to the amount of competition that exists in market between producers. Degree of competition can be thought of as lying along a continuum with very competitive markets at one end and markets in which no competeion exists at all on the other end.
Building and construction industry is said to be in monopolistic market which includes:
Many buyers and sellers- Construction line are not the only sellers and therefore cant influence price through its activities, otherwise buyers will go elsewhere with constructionline loosing profits.
Similar Goods being sold-Therefore constructionline and other construction industries ant charge extra for certain goods as consumers will go elsewhere.
Perfect knowledge in the market- This means producers and consumers have perfect knowledge of prices and products, therefore any one firm cant alter their prices or consumer will go elsewhere.
No barriers to entry or exit- There is nothing to prevent an industry or firm of setting up., constructionlin cant d much to stop new entrant. This would increase competition and lower prices for consumers.
Macroeconomic indicators
Inflation- General sustained rise in level of prices. If inflation was high then people would demand less of goods as they are more expensive. Houses would be more expensive as inflation is high , this would mean people would not want buy houses and demand for houses would fall, equally demand for constructionline and other construction industries would fall, leaving loss in demand resulting in loss of profit.
Levels of employment- If employment levels were high then the Uk economy would be enjoying sustained growth and consumers confidence be high. Equally government revenue would be increasing from taxes. This would create positive feeling and with consumers in employment can manage to invest their earnings into a house or a bigger house. They would have long-term security in their job and would be able to pay bills which would incur from buying a house. This would increase demand for construction industries and in return they will increase supply to meet demand,. This would enhance stability and future profitability
Conclusion-
From the research and analysis above it can be said that the housing industry was in much decline, this mainly due to supply and demand factors which determine the house of prices, whether they are too expensive or too cheap. The determinants of demand supply restrict the demand and supply and increase or decrease the prices of houses. Consumers are unable to pay extreme amounts of money on purchase of houses. This also depends on economic factors mentioned above like employment. Those that are unemployed can’t obviously be able to purchase house but those with secure job can. Also inflation and interest rates play vital role in determining the demand and supply for houses, high interest rates deter ate people from taking out loan and mortgage, which reduces demand of houses and reduces the demand of construction industries. What ever reduces the demand of houses equally reduces the demand of construction industries.
Recommendation-
Government intervention could be needed to resolve the problem of falling demand for house. What could be doe is lower interest rates, this would encourage people to take out loans and mortgages and for return pay less in interest. This would increase demand and increase demand for construction industries. Another measure could be to decrease house taxes , this in return will also increase the demand of houses as consumers will have to pay less to keep the house running. Government could also step in and provide subsidies to those who receive less earnings or those that cant find employment, this would also increase the demand for houses and profit for construction industries. All these measures can increase demand and in return supply
of houses which will see demand and profits for construction industries increase. This would improve economic growth and stabilise the economy.
Sources and Bibliography
Websites
Sources
Books
Dr Phil Drummond- Businees environment
John Sloman- Economics 5th Edition
Contents
Determinants of Demand for houses Page 1-3
Price Page 1
Income Page 2
Level of economic activity Page 2
Level of rents Page 3
Interest rates Page 3
Expectations of future prices Page 3
Ratio of income to house prices Page 3
Determinants of supply for houses Page 4
Price Page 4
Price of land Page 4
Cost of building material Page 4
Other determinants of demand Page 5
Number and price of substitute goods Page 5
Number and price of complimentary goods Page 5
Other determinants of supply Page 6
Nature random shocks Page 6
Market structure Page 6
Macroeconomic indicators Page 6
Inflation Page 6
Levels of unemployment Page 7
Conclusion Page 7
Recommendation Page 7
Sources and Bibliography Page 8
British Building and Construction Industry Report
