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Worksheet on the Housing Market (Advanced)

• Housing Market Worksheet (Advanced)
• Tutor notes

As with any other market, the price of houses is determined by the forces of supply and demand. If there is a high level of demand with supply staying the same, then the price will increase and vice-versa. This worksheet looks at the factors affecting supply and demand in the housing market and goes on to examine the way in which prices have changed in recent years.

Step 1 - Supplying the demand and demanding the supply?

Use your textbook or course book to find out the determinants of demand and supply and fill them in in the table below:

With the buying and selling of houses there may also be additional factors that affect people's supplying or demanding decisions. Consider what you think are the main determinants of the demand and supply of houses and list them in the table below (include as well the most important factors from the table above):

Step 2 - When are houses in equilibrium?

Equilibrium in a market is when the level of demand matches the level of supply. Any change in either of them will lead to an adjustment in the equilibrium price. Look at the changes to the housing market given in the table below, and try to identify what effect each event will have on the level of demand, supply and price.

Use the above examples and try to identify on the diagram below, the point that the market will end up at following each change. The initial equilibrium is at X.

Step 3 - How do you pay?

Buying a house takes far more money than most people usually have available, and so they often have to borrow. The internet site Houseweb (http://www.houseweb.co.uk/house/index.html) gives some background on the ways in which this can be done. Browse the site to find the answers to the following questions:

What is a mortgage?

What is the difference between a fixed rate and variable rate mortgage?

One of the key determinants of demand for houses is the interest rate. Why is this the case?

Step 5 - Is your rate interesting?

INTEREST RATE - The cost of a mortgage is set by the rate of interest that is charged on it. This may be set for a certain number of years, but will normally vary. To find out how interest rates have changed, go to the Office for National Statistics (ONS) data on Biz/ed (http://www.bized.co.uk/dataserv/ons/data/data.htm). N.B. Look under the monthly data for the interest rate.

From this data identify periods over the last decade where you might have expected demand to be high, and where demand might have been low.

INCOME - Of course the interest rate is not the only determinant of demand for houses. Another important one will be the level of income that people have. The faster the level of income people earn is growing the more money they have to invest in their houses. The overall level of income in the whole economy is known as GDP (Gross Domestic Product) and so if we look at the behaviour of that we can see how the level of income on average has grown.

Go once again to the ONS data on Biz/ed (http://www.bized.co.uk/dataserv/ons/data/data.htm) to fill in the table below for the level of economic growth over the last decade. (You will need to calculate this as the percentage change in GDP, but use GDP at constant prices to remove the effect of inflation).

In the third column identify how you would describe the performance of the economy in that year from the four words given, and in the fourth column put what effect you would expect that level of growth to have on the demand for houses.

Step 6 - Priceless properties?

This step considers how prices have changed in practice, and what factors may have influenced these changes. One of the best sources of information about house prices on the Internet is the Halifax House Price Index. This gives information on how house prices vary from area to area and how they have changed over time.

Use the Halifax House Price Index (http://www.halifax.co.uk/) to try to find out the following:

How much have average house prices gone up since the base year of the index?

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N.B. If you are unsure about index numbers, there is a worksheet on index numbers (http://www.bized.co.uk/learn/economics/macro/indnos/student.htm) available on Biz/ed.

Use the Halifax House Price Index (http://www.halifax.co.uk/) once again to try to find out the following:

How do the prices in your home area compare with the other areas?

What factors may have caused these differences? What differences are there in demand and supply between your area and the other areas?

Use the annual price increase section of the Halifax House Price Index (http://www.halifax.co.uk/) to try to find out the price changes of the average level of property prices in your area between the following years:

Show on the diagrams below the changes that you think have been taking place during these years, and write a short description below the diagram.

1989 - 1994

1994 - 1999

1999 - now