The demand for houses
An increase in the demand for houses can be caused by:
Income – rapidly increasing incomes tend to cause significant
increases in the demand for houses.
Desire for home ownership – there is a certain status associated
with home ownership.
Cost of mortgages – if the cost of mortgages are low then demand for
houses will increase. This can
be caused by low interest rates, good fixed rates, discounted interest rates
Availability of mortgages – at certain times financial institutions
may make it easier to obtain a mortgage. Examples include allowing people to borrow more, cash back
schemes and 100% mortgages.
Price expectations – a big influence on demand is if people believe
that houses prices will continue to rise.
People thus believe that if the buy now they can sell at a profit
later. This has led to many people buying houses with the intention of
letting them out and making a capital gain on the property.
has lead to the Abbey National believing that now is a cheaper time than ever
to buy a new home.
The supply of houses
In the short term the supply of houses is relatively
inelastic since it is very difficult to bring new houses on to the market.
In the longer term supply can be influenced by:
Costs of production – building costs such as price of land a wages
can shift supply to the left.
Government regulation – new government regulations can severely
restrict the number of house being constructed.
Council house sales – in the 1980’s the government encouraged
people to purchase their council houses.
Effects on equilibrium
The diagram below shows the effect of an increase in
demand on the price of houses with an inelastic supply curve:
Any increase in demand means only a small short term
increase in supply but a relatively large increase in price.
The reason for the government to have rent controls is
to provide cheap rented accommodation for the very poor. The effect can be seen on the following diagram:
The rent control is an example of a maximum price,
which brings down the cost of renting a house (R2).
There are however a few problems as a result:
The quantity of rented accommodation available falls
There is now a shortage of rental accommodation equal
to Qd – Qs.
In the longer term landlords may opt not to rent out
their accommodation and sell it instead, because their profits have fallen
due to the lower rents now available. This
will bring about a further fall in the availability of rented accommodation
and therefore an even bigger shortage.
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