Changes in House prices in UK over the Last Three Years Essay

Changes in House prices in UK over the Last Three Years - Essay Example This was a very big challenge for citizens to purchase houses. It happens in that; the demand for houses has gone up from Q1 to Q2, but the quantity supplied has not changed and remains stable at Q1. This means the number of houses available in the market is minimal than the number of houses the buyers are willing and able to buy. This created a shortage for the houses, which is the difference between Q2 and Q1. According to supply and demand theory, when demand is high and supply is low, the sellers tend to increase the price of a commodity from P1 to P2. In the short run, supply in the house market is inelastic. Therefore, the increased demand translates to an increase in the prices of houses. The increase in prices results from the fact that the supply (Q1) of houses is not equal to the demand (Q2) of houses and this causes disequilibrium in the market (Higson, 2011: 81). However, the prices of houses in the long run have gone down. Several factors cause the decrease of the house prices. One of the factors leading to decrease in prices is that the government has ensured that interest’s rates of getting a loan are very low. This has encouraged investors to obtain mortgage loans at relatively low interest rate. This implies that they are able to refund the money with very little amounts of interest. Therefore, supply of houses has gone up within the period. When supply increases, the price of the houses go down since the supply exceeds demand. On the other hand, deposit rates of a mortgage have been high, and this leads to a decreased demand. As a result, there has been excess supply in the house market. Another factor that has led to the decreased demand of houses f or the last three years is that the rate of unemployment has gone up. Reduced interest rates have resulted to losses in the financial institutions. These institutions have to lay off some of their employees. Therefore, many people end up losing their jobs and this increase the rate of unemployment. This increases the number of people without the ability to pay the high mortgage deposits (Vermeulen, 2003:37). This means that the number of capable buyers of houses has reduced. As a result, the demand for houses decreased yet the supply of houses increased form Q1 to Q2, yet the able buyers remain Q1 who are less as compared to the supply. Therefore, because of an increase in the unemployment rates, this is a cause of low demand in the house market. According to the demand and supply theory, when the supply increases and demand decreases, the price of a commodity falls from P1 to P2. Another factor that has led to falling of the house prices in UK is issuing of residues to investors in the house market. This has encouraged investors to build more houses hence increasing the supply of the houses. Increase in supply is subject to a reduced demand and a decrease in the house prices (Geyer, 2009:138). This increases the loss made by financial institutions because residues discourage investors from borrowing from the lending institutions. Finally, lenders continue making more losses. This leads to a high rate of unemployment when the companies continue making losses. All these discussed factors leading to the reduced prices are crucial and have relatively led to a decreased demand (Geyer, 2009:139). In the coming years, the prices of houses will continue going down. The reasons for the low prices are that people will continue losing their jobs, and this will reduce demand for houses in UK. However, though the mortgage finances availability