Economics for Business: Housing Price Factors and Policies

This report delves into the economics of the UK housing market, providing a comprehensive analysis of the factors that influence private housing prices. It begins by identifying key determinants of demand and supply, employing economic principles such as the law of demand and the law of supply. The report examines various factors affecting demand, including affordability, interest rates, population changes, economic growth, and the cost of renting. Similarly, it explores supply-side factors such as new house construction, planning restrictions, local opposition, and the profitability of new developments. Furthermore, the report evaluates economic policies used to stimulate the demand for private housing, focusing on fiscal and monetary policies. Fiscal policies, encompassing tax rates and government spending, and monetary policies, primarily interest rate adjustments, are discussed in detail, illustrating their impact on the housing market. The report concludes by highlighting the interplay of these factors and policies in shaping the dynamics of the UK housing market.

Economics for
Business

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
TASK 1............................................................................................................................................1
1. Identify the factors which affect the price of private housing in the UK................................1
TASK 2............................................................................................................................................7
1. Explain economic policies that used to stimulate the demand of private housing..................7
CONCLUSION .......................................................................................................................9
REFERENCES..............................................................................................................................10

INTRODUCTION
Business economics is the application of economic theories which is used by the
organizations to analyse factors that contribute for the diversity of business structure. It is
essential to analyse the relationship of firm with product market, capital or labour. Economics for
business helps in focusing economic issues as well as problems related to the organizations,
management and strategy (Berck, 2018). Before formulating any strategy they have to analyse
the factors which impact the demand as well as supply of the commodity. This report cover
various topics such as identify main factors by using demand & supply analysis which impact the
price of private housing in the UK. Along with this, evaluate economic policies that used to
stimulate the demand of private housing.
MAIN BODY
TASK 1
1. Identify the factors which affect the price of private housing in the UK
Law of Demand: It is the economic principle that refers to the desires or needs of
consumers regarding purchasing of goods & services and it also include the willingness to pay
for goods. All the factors are constant rather than price, when price increases then demand of
commodity decreases and vice versa (Law of Demand, 2019). Basically, there is inverse or
negative relationship between price and quantity demanded by consumers. Below mention graph
will provide better understating of law of demand in context of business.
Illustration 1: Demand Curve, 2019.
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(Source: Demand Curve, 2019)
From the above mention graph, P denotes price of goods and Q denotes the quantity
which demanded by the customers. In context of private housing in the UK, when price of
property increases from P2 to P1 then demand automatically reduces from Q2 to Q1 and vice
versa. DD represent the demand curve which shows the impact of price on private housing in the
UK.
Law of Supply: It is also one of the economic theory which help the business corporate
to understand the relationship of price and quantity supplied for a goods. Here, all the factors are
constant rather than price. Basically, when price of product increases then suppliers raise the
production of goods and supply in the market (Law of Supply, 2019). In context of private
housing, when price of building raise then construction company also increase the supply and
vice versa. There is a positive relation between price and quantity demanded by consumers. With
the help of supply cure, learner able to understand the concept of supply in the private housing
sector. Supply curve mention below:
Illustration 2: Supply Curve, 2019.
(Source: Supply Curve, 2019)
From the above diagram it shown that supply curve is in upward sloping because of
positive relation between price and quantity supplied. When price increases from P3 to P2, then
quantity also increases from Q3 to Q2. There is positive relation among the price & quantity and
it will be possible when all the factors are constant rather than price.
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Factors which affect the demand of private housing:
There are various factors which affect the price of private housing in the UK (Factors
affecting Demand & Supply of Private Housing In the UK, 2019). Some of the factors discussed
below which impact the demand:
Illustration 3: Factors that impact the Demand & Supply of Private Housing, 2019.
(Source: Factors that impact the Demand & Supply of Private Housing, 2019)
Affordability of housing: When income raise, then it will indicate that people are able to
afford to spend on properties. At the time of economic growth, demand of buildings increases
and it become luxury goods (Böhme and et.al., 2015). So increase in income will raise the
demand of private housing.
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Illustration 4: Affordability of Housing, 2019.
(Source: Affordability of Housing, 2019)
Above mention graph shows the rapid growth of housing sector prices and it will be done
because of various factors which impact the demand in short run. Increase in the income will
increases demand of private housing in the UK.
Interest rate: It is the major factors which influence the demand of housing and
determining the cost of mortgage interest repayment. Majority of UK houseowners prefer to take
mortgage rate, so change in the base rate by Bank of England will immediately impact the
mortgage interest payment. Interest rate is the factor which determining the affordability of
housing (Dirican, 2015). Higher interest rate will reduce the demand of private housing on the
other hand, low interest rate will encourage people to invest in properties.
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Illustration 5: Interest Rate of Housing, 2019.
(Source: Interest Rate of Housing, 2019)
From the above graph it represented that, in 1992 due high interest rate that was 15% and
it collapsed demand of housing. After that, 1900s or 2000s encourage people to but more houses.
In 2008 – 2009 interest rate were reduced by 0.5% but still the demand remains low because of
other factors which influence the demand such as recession, increase unemployment etc.
Population: It is not the number of people but demographic change because growing
population will increases the demand of private housing in the UK. Population can change due to
migration of people as well as birth or death. Demand for housing depend upon the average size
of households and social & demographic factors cause to increase number of households. These
factors include life expectancy, divorce rate etc.
Economic growth and disposable income: Increase in the income of individual enable
people to afford mortgage and it will increase the demand of private housing. On the other hand,
low income will reduce the demand as well (Drăgan, Ivana and Arba, 2014). In the boom
condition, income is elastic so demand for housing sector is rapidly increases.
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Cost of renting: If cost of renting increases then household give efforts to purchase their
own house which increases the demand of housing in the UK. Due to high cost of renting, this
factor encourage people to stretch their budget or bought new house for them. UK market is
more expensive for renting houses. So basically, increase in the cost of renting will increases the
demand of private housing in the UK and vice versa. After 2011, cost of renting increases around
22% it will cause the financial crisis and housing crash.
Factors which affect the supply of private housing:
Other than demand factors, there are various factors which influence the supply the
private housing in the UK. Some of them mentioned below:
New Houses: IN the UK, new houses build according to the demand of buildings and in
the 1960s, demand of housing sector was on peak where around 400,000 new houses build per
year. In the late, 1990s and 2000s demand of houses decreases to 150,000 which is less than
requirement of housing in the UK.
Illustration 6: New Houses in the UK, 2019.
(Source: New Houses in the UK, 2019)
Planning restrictions: It is one of the big issues in the UK that there are various
restriction on constructing building on green belt land. Before developing any house,
constructors have to take permission from the authoritative body because there are various land
which is restriction for construction (Freire, 2014). This factors also impact the supply of
housing which need to analyse.
Local opposition: At the time of manufacturing new building there are local
communities which oppose to it. Because local community refer to live in the village area and try
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to avoid congestion. This factor also impact the supply or reduce the construction of new
buildings.
Profitability of developing new houses: It is totally depend upon the demand of private
housing and its prices (Lawrence, 2018). In the boom situation suppliers build more houses and
fall in the house price can lead to restriction in supply.
From the above mention factors impact the supply of private housing and it further
influence the demand of housing in the UK.
TASK 2
1. Explain economic policies that used to stimulate the demand of private housing
Government concern about the need to consumers regarding houses and it will impacted
due to growing population and there are not enough houses which satisfy the needs of people. Its
aim to increase the supply empty homes as well as new buildings. In 2012, around 118,190 new
home complete in England and it is 9% higher than previous year (UK Housing Shortage, 2018).
But, in the 2008, it was reduces about 31% that is around 170,610 because of recession. In order
to balance housing market, government build various policies which impact the demand of
private housing in the UK. There are some policies develop by government which mentioned
below:
Fiscal policy: It refers to the adjustment which done by the government which further
affect the demand of private housing in the UK (McCabe and Snyder, 2015). This policy include
income tax and government spendings which required to adjust according to the situations. In
order to boost demand of private housing, government reduce the tax rate as well as increase
their spending which help the consumers and make the capable to afford new house through
increasing their savings. On the other hand, if government wanted to reduce demand of housing
sector then they will increase income tax as well as decreases their spendings.
 Tax rate: In order to maximise the demand of housing sector, government will reduce
the tax rate which encourage the savings and it further make consumer able to purchase
properties. Basically, low tax will increase demand of housing if other factors are
constant rather than prices (Milne and Parboteeah, 2016). Along with this, high income
tax will reduce the willpower of purchasing property. So basically, this policy developed
by the government in order to make balance in the economy.
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 Government spending: This strategy used by the government in order to boost the
demand of private housing in the UK. Government increase their spendings which
encourage individual to spend in housing property. On the other hand, low spending will
reduce the demand as well. It will be possible when all the factors are constant rather than
price. Use of fiscal policy is beneficial for economic growth and helps in maximising
GDP of country. It will happen in the boom situation where government increases their
spending in order to face inflation through taking borrowings and make economy
balance. This factors affect the demand of housing so with the help of fiscal policies
country able to meet the requirement of private housing with consumers.
Monetary policy: It is one of the economic policy which help the country to make
balance between supply & demand of private housing in the UK. Monitory policy managed by
the central government which include the money supply and they have to make sure that supply
of money will be effective otherwise it influence the demand of consumers regarding private
housing (Mulhearn and Vane, 2015)). Below mention factor help the economy to manage
demand or supply and government change their policy according to the situation of economy.
 Interest rate: It is one of the important factor which affect the demand of private
housing. In order to increase demand, government reduce the interest rate which
encourage people to invest their money in the property. It further increase the supply of
new building due to high demand. Low interest rate motivate consumers invest in the
new houses. On the other hand, high interest rate will reduce the demand of housing in
the UK. Government follow these policies and build strategies in order to balance
inflation, liquidity, growth of economy, consumption etc. Interest rate reduces by 0.5% in
2009 and it will boost the demand of private housing and reduce renting houses demand
in the UK. These strategies formulated in order to maintain supply of money as well as
demand of private housing which influenced due to various factors which already discuss
above.
Monetary or fiscal policy developed by the government in order to maintain demand or
supply of private housing in the UK. In order to boost demand, government increase their
spending, reduces the income tax rate and interest rate (Norris and Vaizey, 2018). These factors
motivate people to purchase their own house because cost of renting house also very high. With
the help of lower interest rate, people able to afford new house or if interest rate increases then it
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will raise the mortgage interest payment which influence the demand of private housing in the
UK.
Factors that impact the demand of private housing:
Other then above mention factors, there are some factors which affect the demand of
private housing in the UK.
Renting not affect the interest rate: Renting house does not get affected by the interest
rate, no matter interest is high or low. But renting cost impact the demand of private housing in
the UK. Low interest rate will encourage propel to buy new house and high interest rate will
reduce the will power to purchase any property.
Supply more elastic: In the UK, rental house is more elastic in comparison to private
housing (Saviotti and Metcalfe, 2018). If cost of renting increases then it will forces consumers
to push their budget or invest in the housing sector for private property.
Buying home as investment: when people have enough savings so they think to invest in
the properties as an investment which further affect the demand as well as supply of private
housing. In order to boost demand, government implement various policies where they reduce
the interest rate as well as tax rate.
Above mention factors affect the demand of housing such as high renting cost will
increase the demand. If renting cost reduces then it will automatically reduce the demand of
private housing in the UK.
CONCLUSION
From the above discussion, it has been concluded that demand & supply analysis are vary
important for organization. Because of the help of it, business able to understand the market
trend and the factors which impact the demand as well as supply of goods. Law of demand and
supply help the readers to analyse those factors which influence the demand of private housing.
In order to balance the economy, government introduce various policies which affect the demand
of housing sector. These policies includes fiscal as well as monetary where government reduce
tax rate, interest rate and increase government spending. There are various factors which
influence the demand of consumers in the area of private hosting such as interest rate,
population, economic growth etc.
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REFERENCES
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Online
Factors affecting Demand & Supply of Private Housing In the UK. 2019. [Online]. Available
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<https://www.economicshelp.org/blog/15390/housing/factors-affecting-supply-and-
demand-of-housing/>
Law of Demand. 2019. [Online]. Available Through:
<https://economictimes.indiatimes.com/definition/law-of-demand>
Law of Supply. 2019. [Online]. Available Through:
<https://economictimes.indiatimes.com/definition/law-of-supply>
UK Housing Shortage. 2018. [Online]. Available Through:
<https://www.tutor2u.net/economics/reference/uk-housing-market-the-housing-
shortage>
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