Demand Side Factors

Topics: Inflation, Economics, Unemployment Pages: 6 (2182 words) Published: September 29, 2011
1.0 Introduction
House price watching has become a countrywide recreation. Horrible housing market has become an issue to the world. People are taking this as an important topic where in the future, house price will continue increase. Some people are saying that it is a speculative bubble; houses are risky assets with volatile prices. In other words, it might face over demand or under supply. In seller market, when the market demand for possession in the exacting area is high and when there is existing of shortage of high quality possession, such as scarce in supply, then the power of balance in the market will shifts to the seller. For the reason, it is apt excess demand in the market for good possession. Seller flexible to wait for offers on their possession to exceed their minimum selling price. In opposite, when the demand for any type of housing is weak and when there is excessive of possession available on market, then the powers will swap to potential buyers. Does anyone ensure that the house prices in rapid growth are causes by the fundamental factors of demand and supply and when it is an indefensible bubble? In this report, we explain how to appraise the situation of house prices, the factors that affecting the house price to increase rapidly, both whether the existences of bubble and what principal factors support housing demand, in a method that is argument in economic theory. Showing both Demand side factors and Supply side factors as well as in the long run and short run. In the short run, demand side factors tend to be more important come to influence the house price because the willingness and ability of potential home buyers or investors to make an offer to purchase a particular property.

2.0 Demand Side Factors:

2.1 Economic growth

Over a long period, economic growth will certainly push up incomes and house prices and increase the demand for better quality. It’s just like a cycle; economic growths lead to a rise in income and eventually will bring a higher purchasing power for consumer then come back to economic growth. Therefore, why house price increase tremendously; one of the reasons could be the economic growth in one country. In other words, the fluctuation of house price is also important for either economic growth or recession. For example, a terrible recession in US economy has been saved by the crash of the stock market 2001; it then triggered a recession since 2007.

2.2 Interest rates

Interest rate is the rate of charger articulated as percentage rate over the period of one year that pay by a borrower of how much they borrow from a lender. For example, the Bank of England in United Kingdom stands rate various between 0.5% and 15 % from 1989 until 2009. The Bank of England cut the interest rate as low as 0.5 % in order to boost the money supply to revive the economy in UK by a policy called quantitative easing in an effort to boost bank lending. Basically, changer in the interest rates could affect the demand for housing in the market since mostly of the homes is purchase with the aid of a mortgage; this is called as Keynes interest-effect. When the interest rate is low lead to the cost of borrowing become low, these increases the rate of mortgage on borrowing by encourage the consumer to invest or purchase more in real estate. The declining in aggregate demand will eventually cause the price to be increase and finally inflation become worsens. This is due to the positive relationship of investment and negative relationship with the interest rate. Conversely, an increase in the interest rate will lead aggregate demand to decline. Household and firms will cut their spending and investment and this will shift the aggregate demand curve to the left. When the firm production decreases, they will start to lay off workers, and unemployment rate will rise. Due to the declining in demand, the price level become lowers and the economy is in recession.

2.3 Consumer confidence...
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