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Worksheet on the Housing Market (Beginners)

• Housing Market Worksheet (Beginners)
• Tutor notes

The housing market is the overall market where houses and other properties are bought and sold. Like any other market it can be modelled using demand and supply analysis. When the number of houses being offered for sale at a given price matches the number of houses wanted at that price, the market is said to be in equilibrium. If demand or supply change, then the equilibrium price will change too. Fill in the table below to say what you think will happen to price in each case.

Let's now start to investigate the housing market and what has been happening lately.

Step 1 - Basic terms

Go to the internet site Houseweb (http://www.houseweb.co.uk/house/index.html) and browse it to find the answers to the following questions -

1. What is a mortgage?

2. Who would you go to to get a mortgage?

3. How much would they allow you to borrow?

4. What is the current mortgage rate and what is likely to happen to it over the next few months (see the 'recent news' section) ?

Step 2 - Prices

Houseweb also has details of houses for sale, and house prices. Use this link again to fill in the following information - Houseweb (http://www.houseweb.co.uk/house/index.html)

Have prices gone up or down in the last twelve months? What do you think has caused this?

Show on the demand and supply graph below, what you think has happened in the housing market recently.

Step 3 - Determinants of demand and supply

To analyse demand and supply further, it is important to understand what causes them to change. The factors that affect each of them are known as the determinants of demand and supply. Try to think of all the things you can that may affect demand for and supply of houses, and list them below:-

An important part of the definition of demand is that consumers have to be 'willing and able' to purchase a given item. If this is the case then the demand is known as an effective demand - i.e. one that will be carried out at the right price. To be able to purchase a house, you have to have the money - the people you're buying off will get very fed up otherwise. As we saw in Steps 1 & 2, houses are very expensive items and so most people borrow the money, or in other words take out a mortgage. This means that one of the most important determinants of demand is the availability and cost of a mortgage.

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 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 identify periods over the last few years 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 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. (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 4 - Further study

To try to work out further what has happened recently to the housing market and what may happen in the future, you may want to browse some of the links below. Consider particularly the following issues:-

the present and expected level of economic growth
consumer confidence
interest rates - now and in the future
the willingness of people to sell
budget changes (in tax relief on mortgages)
the level of unemployment

As we have seen all of these will affect supply and demand in the housing market and may push prices up or down. Here are some links to try:-

• HM Treasury (http://www.hm-treasury.gov.uk/)
• Nationwide Building Society (http://www.nationwide.co.uk/)
• Houseweb (http://www.houseweb.co.uk/house/index.html)
• The Guardian (http://www.guardian.co.uk/)