Using demand supply analysis, discuss the extent

I shall get down with a brief description of the behavior of the UK lodging market over the period we are concentrating on. A simple graph associating to the nucleus of that period speaks volumes.

Beginning: www.hm-treasury.gov.uk/

It shows strong monetary values rises throughout the 1880ss followed by monetary value contractions into the 1890ss. This type of behavior is often seen in belongings markets and is called a ‘boom & A ; broke ’ . The simple account is that demand additions rapidly for a myriad of grounds – many unforeseeable. The market can non respond rapidly plenty with sufficient supply and this causes monetary values to lift to apportion what is available. Fear, terror and guess normally join the equation and this induces people to come in into the market driving monetary values even higher. The ‘bust’ finally follows as other every bit unanticipated factors now enter the market squelching demand merely as supply is catching up. Monetary values continue to fall as unwanted supply continues to be pushed into a weak market because of dawdling supply and bad purchases forced back the market.

Expanding on the above description we can now concentrate in on the chief factors which were impacting the UK lodging market during this period:

  • Large scale deregulating of the fiscal industry allowed Bankss to vie with the normal mortgage suppliers i.e. edifice societies. This led to the remotion of certain limitations doing an addition in available recognition.
  • A general betterment in the economic system throughout the 1880ss and a decrease in personal revenue enhancement created strong incomes growing. This increased peoples abilities to finance mortgages.
  • There was a important growing in the cardinal age groups that purchased belongings.
  • UK borrowers normally take mortgages at short-run rates. This can increase the volatility of demand in times of big swings in rates.
  • The Thatcherite political doctrine, which actively encouraged place ownership, besides affected demand. Equally the same doctrine actively discouraged councils organize constructing public lodging. This reduced one component of supply.
  • The clip taken to construct houses and the limited handiness of land in certain parts of the UK is another factor.
  • A critical factor in the lodging market was a psychological 1. Greed and fright can falsify peoples perceptual experiences increasing the amplitude of any rise or autumn.

Using these factors to analyze the demand supply model, we can now see how much of the behavior of the market can be explained by economic theory.

Let us presume that in the early 1980s the lodging market was in equilibrium i.e. the measure of lodging demanded equaled the measure supplied and their was neither a excess or deficit in the market. The demand curve accurately represented the measure that consumers were willing to buy at assorted monetary values ; and the supply curve the sum willing to be supplied at assorted different monetary value degrees.

However, within a short clip the factors we have outlined above began to impact on both the demand and supply constituents.

The Demand Curve

In the old ages after the election of the Thatcher authorities in 1979 a combination of the above factors increased demand for lodging well. Interest rates began to fall, fiscal deregulating meant that loans were easier to obtain, the political clime encouraged place ownership and there was general addition in the demographic group that wished to buy houses. This led to a displacement in the demand curve up and to compensate i.e. there was a general addition in the overall demand for houses at all monetary values instead than merely a motion along the demand curve.

The Supply Curve

In theory providers should hold responded by bring forthing excess supply in order to run into the ability to pay more – a motion along the supply curve. However, the two brinies beginnings of supply had cardinal jobs. The private providers who built and renovated belongings could non respond fast plenty as there are obvious physical restrictions on edifice and geting land. This slowdown meant that in the short-run the supply of houses was about fixed. This drove up monetary values as the measure could non alter.

Besides, for political grounds, the authorities wanted to extinguish councils from the equation. This put more force per unit area on the private providers to replace their end product every bit good.

The supply side finally reacted and more and more resources were devoted to edifice houses. With a displacement now in both the supply curve and the demand curve the measure being supplied increased dramatically. This can be seen in the by the fact that the figure of private homes being “produced” peaked in 1988 with 175,000 units. Yet the rise in monetary values during this period was every bit impressive as psychological factors evidently took clasp and people bought for bad grounds – this is evidently non based on any economic principle but can be understood and reflected within a demand/supply model. The excess demand was still devouring the excess supply.

In the early 90s involvement rates rose and in 1992, because of the Sterling Crisis, jumped to degrees unimagined by many new house proprietors. The sudden and dramatic addition in mortgage hit an already weakened lodging market and led to a bead in demand for lodging. It besides impacted peoples ability to refund mortgages. Potential purchasers became nervous and pulled back from buying. As monetary values fell people waited for farther monetary value falls. There was besides an surplus of supply coming back onto the market from bad beginnings, foreclosures and lodging that was already in the edifice grapevine. This resulted in another displacement in the demand curve and supply curve which reduced the equilibrium point – the monetary value. This caused the falls in the monetary values we see after 1989 as the market returned to a less volatile equilibrium.

In summing up we can state that the behavior in the UK lodging market is in most portion explained by demand and supply analysis.

Bibliography

Muellbauer, J, Murphy, A, 1997,Booms and Flops of the UK Housing Market” , Economic Journal, November 1997.

hypertext transfer protocol: // World Wide Web. Housingoutlook.co.uk, accessed Jan 2006.

Ball, M, 1993,Housing Policy and Economic Power, New York:Methuen & A ; Co.

UK House Prices: Tax return to “boom-bust” ?, downloaded Jan 2006 from www.bized.ac.uk/timeweb/digging/dig_verifying_work3.htm