A market exists wherever there are buyers and sellers of a particular good. The buyers demand the goods from the market whilst sellers supply goods onto the market. Price is the market value of the good and is decided depending on the changing conditions of demand and supply. The law of demand states that more will be demanded the lower the price when all other things remain equal – ceteris paribus. The law of supply states that the more that is supplied the higher the price. As these two factors change, the price of the product changes.
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Where the curves on the graph cross it is known as the equilibrium price. This is where demand equals supply. Changes in demand and supply will lead to new equilibrium prices being set. A change in demand will lead to a shift in the demand curve, a movement along the supply curve and a new equilibrium price.
If given a choice, consumers in the UK would prefer to own their own homes rather than rent. This has led to an increase in demand for owner occupied housing. As demand increases, the producers will supply more therefore, the supply increases to try and meet the demand. The combination of these two factors determines the price.
The first factor that affects the demand of housing in the UK is the rising incomes. The real incomes in the UK have been rising at an average 2.5% over the past 40 years. This has led to the average real personal disposable income of households to rise. This means each household has more money to spend and makes home ownership more affordable. Rising income has led to a rising demand in housing as people can now afford to buy their own homes. A rise in demand will cause the demand curve to move to the right, which causes an increase in price.
The second factor that increases the demand for housing is a rising population. The population in the UK has been rising steadily over the past 25 years. This has led to an increased demand for housing; there are more people that need a place to live. Between 1971 and 1991 there was a decline in the average size of household in Great Britain, from 2.91 persons to 2.48. It continued to decline at a slower rate throughout the next decade, falling to 2.32 by 1998. This also leads to rising demand as there are more people in the UK than ever before and less people per household. A rise in demand will cause the demand curve to move to the right, which causes an increase in price.
The third factor that affects demand is speculation about the housing market. For example, in the 1990’s, house prices stayed fairly subdued. This meant people saw houses less as an investment as the prices weren’t rising as much. This lead to a decrease in demand. A decrease in demand would cause the demand curve to move to the left, causing a decrease in price.
The fourth factor that effects demand is interest rates. When consumers buy a house, they usually need a mortgage. This is a way of borrowing money to buy property. When potential buyers are looking to buy a house they look at the price of the monthly payments on the mortgage as much as the price of the house. When interest rates rise, the amount paid in monthly repayments rises. This leads to a decrease in demand for owner occupied housing. People have to pay more each month which makes buying a house less attractive. A decrease in demand would cause the demand curve to move to the left, causing a decrease in price.
The price of items is determined not only by the demand for the product but by how much can be supplied. How much can be supplied is very influential on the price. A change in the supply will lead to a shift in the supply curve, a movement along the demand curve and a new equilibrium price.
The first factor that affects the supply of housing is a rise in the price of land. If it becomes more expensive to supply housing then the supply will fall which will lead to an increase in price. This is because there will be excess demand in the market, so competition for housing will be fierce. Today, the increase in cost is because of the rising price of land, especially in sought after areas such as in big cities like London and Manchester. Also, as the housing market became more profitable, the Local Authorities made it harder to achieve planning permission. This drove up the cost of building land, therefore decreasing the ability to supply. Another factor in the supply of land are Government regulations. For example, green belt land is land where building is severely restricted. As green belt land is increased by the Government, finding land to build on is becoming increasingly difficult. This has led to a decrease in supply of housing, again leading to excess demand. A decrease in supply would cause the demand curve to move to the left, causing an increase in price.
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The second factor decreasing supply of housing in the UK is labour. If they are paying too much in labour costs it wouldn’t be profitable to build housing. Wages in the building industry have been slowly rising in the past 25 years. Minimum wage has also just been increased for 16 year olds and above. This will lead to rising labour costs and a decrease in supply of housing. A decrease in supply would cause the demand curve to move to the left, causing an increase in price.
The third factor affecting supply is new Government legislations. In 1980, the Government gave tenants the right to buy their council houses. This led to an increase in the number of houses in the owner-occupied market. This led to over one and a half million houses becoming owner occupied. This legislation bought in by the Government has increased the supply of housing. An increase in supply would cause the demand curve to move to the right, causing a decrease in price.
The fourth factor affecting the supply of housing in the UK is the Government subsidies. The Government have many schemes to try and improve the UK’s less profitable areas by paying businesses to build there. This includes building businesses to improve employment in these areas and houses for these people to live. This has led to an increase in housing as building has become more profitable for companies who are receiving subsidies from the Government. An increase in supply would cause the demand curve to move to the right, causing a decrease in price.
The price of owner occupied housing is determined by how much is demanded compared to how much is supplied. As the demand and supply curves fluctuate, the price of owner occupied housing imitates these movements.
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