What Determines the Price and Volume of Houses in Bishops Stortford and What Does the Future Hold, Economics, College Term Papers.com


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What Determines the Price and Volume of Houses in Bishops Stortford and What Does the Future Hold

What Determines the Price and Volume of Houses in Bishops Stortford and What Does the Future Hold What Determines the Price and Volume of Houses in Bishop’s Stortford and What Does the Future Hold? Centre name: The Bishop’s Stortford High School The problem that will be investigated in this coursework is the problem of what determines the price and volume of sales of a detached (semi detached, terraced) house or flat in Bishop’s Stortford and what are the prospects for house prices and sales in the future. I am looking into this problem because it will help me personally because I, myself, might need to find a house that I can afford to buy in the future. The economic theories that will help analyse the problem will be the theories of Price, Demand and Supply, Price elasticity of supply, Income elasticity of demand and Cross elasticity of demand. Price: The cost of a good or service to a buyer. Cross elasticity of demand measures the responsiveness of quantity demanded of one product to the change in price of another product, the exact formula for cross elasticity for product x is: percentage change in quantity demanded of product x percentage change in price of another product Income elasticity of demand measures the responsiveness of quantity demanded to a change in income, the exact formula for income elasticity is: percentage change in quantity demanded Price elasticity of supply is the relationship between change in quantity supplied and a change in price. The exact formula for price elasticity of supply is: percentage change in quantity supplied Demand: The quantity that a buyer is willing and able to buy over a period of time. For normal goods there is an inverse relationship between quantity demanded and the good's own price. Supply: The quantity of a commodity that is offered for sale at a price over a period of time. There is usually a positive relationship between supply and price. See also price elasticity of supply. The diagram below shows a general demand and supply curve. At a price of P3, demand will be Q2 but Q5 will be supplied. The price of P3 is too high for everything produced to be sold. Excess supply will exist (i.e. a situation when supply is greater than demand, leading to an excess of commodities on the market). If the price is P1, then producers will only want to sell Q1, but buyers will want to buy Q4. Many buyers will be disappointed because there will not be enough goods to buy. Excess demand will exist (i.e. a situation where demand is greater than supply, leading to shortages of commodities). Only at a price of P2 will demand exactly equal price. This price is known as the equilibrium price. It is the price where the forces of demand and supply are matched so that there is no tendency to change. When there is excess supply, suppliers will not continue forever to produce more than they can sell. They will cut back production, and reduce prices, until supply again equals demand. If there is excess demand , firms will push up prices and expand output to take advantage of the situation where buyers want to buy more. House prices are determined by both demand and supply factors D2 increased Demand pushes up equilibrium price to P2 One of the key determinants of demand for houses is the interest rate because most people finance the buy of a house by borrowing money. A high interest rate means high loan repayments and will therefore restrain the demand for houses. So the lower the interest rate of a loan for a property, the higher the demand for houses because the loan repayments will be lower. At a time when the rate of interest is low the repayments of a mortgage work out to be cheaper than renting, which is a common alternative. This cost leads to an increase in the demand for houses and that leads to an increase in the price: The rightward shift in demand increases the price from P1 to P2 this extension in the market means the quantity rises from Q1 to Q2. If interests are high then the opposite will happen. The shift is to the right and this drops the price to P1 and the market contracts the quantity to drop to Q1. An important determinant of demand for houses will be the level of income that people have. According to Economics Today, “demand is likely to be highly sensitive to changes in income; a modest rise in income causes a bigger shift in demand” (see Appendix 1). This relationship is an example of income elasticity of demand. As people become better off they tend to buy higher priced houses. Also, a recent trend is that high income earners are buying properties as investment (see Appendix 4). Price of other products also affects demand of houses. If they become more expensive this may impact on homebuyers who were willing to sacrifice house size for such products. This is known as cross elasticity of demand. There are also other factors to take into account that effect the demand for a property; ·it’s size, it’s age, it’s location, etc. Supply is determined by the ability of houses builders to gain permission to create new or extend estates, which acts as a constraint upon the supply of land. If the prices of factors of production (wages, interest, rent, equipment, running costs, capital costs of machinery) are too high and house prices remain constant builders will be less willing to build houses. As costs (of building materials, price of land, etc.) rise, the supply curve will shift left. Quantity of land available is fixed Land is geographically immobile. In theory it is occupationally mobile but constraints upon the charge of use, i.e. from farm land ‘countryside’ green belt to building land (see Appendix 2) Also another factor affecting house prices in terms of supply is tax. As taxes on housing have fallen, more profit from building and selling them can be had by suppliers so the amount offered onto the market increases as taxes on housing falls. Also, high prices of existing properties encourages house suppliers to enter the market with new houses. Objectives also affects supply of houses, as firms become ,more aggressive and willing to sacrifice profit to gain a larger market share or private sellers become more desperate they are willing to sell at lower prices so the supply curve shifts right. Subsidies also influences house prices, if the state chose to provide grants to private house builders or invested in building new council property for people to rent, the supply of housing would increase. If house suppliers can earn a higher return by doing something else, they will get out of housing and go elsewhere which will reduce the supply of housing, if alternative activities become less attractive then more housing will be built; this is an example of ‘opportunity cost’. Increasing productivity of workers may lead to lower costs for builders who will then be willing to supply at lower prices (supply shifts right). However, I hypothesise that the main factor affecting house price is location. Bishop’s Stortford itself happens to be situated near London, which makes it an ideal town to commute from, and there is also the airport, motorway and railway which will attract many people to live in Bishop’s Stortford. What area of Bishop’s Stortford the house is in also plays a part in the price, for example St. Michaels Mead is relatively newly built and so the house prices in that area will be higher. The results I got back from the filled in questionnaires showed: that nearly everyone said a rise in income would encourage them to move into a larger house that most people lived in houses which cost between Ł200,000 and Ł300,000 that some people chose to live in Bishop’s Stortford because it was near to London, some because they lived there all their lives, but most of them because of their job What much does your house cost? Would a rise in income encourage you to move into a larger house? As with all things, demand drives up prices. So, the fewer properties on the market coupled with a growing demand for homes will increase demand and buyers start to outbid each other. Also, every one wants to live in the ’hotspots’ of Bishop‘s Stortford - so these will always be in demand, without the demand for a product the product would not be built, as long as there are people living there will always be a demand for accommodation of some sort. House prices will continue to rise due to the rising population of Bishop’s Stortford. 2. - Maps showing Green Belt Boundary and ‘hotspots’ 4. - House advertisements from ‘The Observer’ and ‘Inter County’ · I used the Internet, particularly specialised sites dealing in economics · I collected information from estate agents (see Appendix 4) · I created and used a questionnaire and asked over 10 people the questions on the questionnaire. · I used my class work book and school textbook, ‘Economics for GCSE Second Edition’. Bibliography: ‘Economics for GCSE Second Edition’

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