Discuss how far rising house prices are likely to benefit the UK economy

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Discuss how far rising house prices are likely to benefit the UK economy.

House prices in the UK, by April, were 9.9% more expensive compared to a year ago, according to official figures. This rise in house price is considered by many as beneficial to the economy however this is not entirely true as it does not benefit everyone.

Price level

S S1





Q Q1 Quantity of homes

The diagram above shows how the demand and supply for houses can increases the price level. The demand curve, in the diagram, shifts to the right from D to D1 and the supply curve shifts from S to S1. Price level in turn rises from P to P1 which increases the quantity of homes from Q to Q1. Supply increases but no to the extent of demand and therefore the price of homes increases.

A reason house prices in the UK have been increasing in the last few years is linked to the supply and demand of homes. As a nation we do not build enough houses to keep pace with a growing population. Since 1982 the population has steadily increased. Rising divorce rates have created a need for more single-person homes. There was also an estimated net flow of 212,000 long-term migrants to the UK in the year ending September 2013, a statistically significant increase from 154,000 in the previous year. This rise in population, for the various reasons, means that not enough houses are being built hence supply does not meet demand pushing the price level up.
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In addition when it's relatively inexpensive to borrow money, such as when interest rates are low, more people may try to qualify for mortgages. Also, improvements in the UK economy will mean more homebuyers as the unemployment rate will decrease and therefore people will feel more confident and may be choose to buy a house. Lower interest rates combined with greater numbers of people with jobs can convince lenders to give more mortgage loans, increasing the number of homebuyers increasing demand and therefore price.

Home owners in the UK make about 70% of the population. In this ...

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