House Prices Essay Research Paper Economics Coursework

House Prices Essay, Research Paper

Economics Coursework: The Price MechanismIntroductionI have been asked to investigate a question similar to .What determines the price of a particular good or product.. I have chosen to answer the question,What determines the price of houses.I have also come up with a hypothesis related to my question, later in my investigation I will either prove or disprove this theory. My hypothesis is,House prices are mainly determined by mortgage rates.To collect my information I will use a wide range of resources. These will be:.The Internet, particularly specialised sites dealing in economics (e.g. www.bized.ac.uk, www.moneyextra.co.uk) .I will try to arrange an interview with someone working within a bank or an estate agent. I will hope to gain a lot of information from these two sources.I will create and use a questionnaire and ask about 20/30 people, with a mortgage the questions on the questionnaire. This is because if I asked someone of my age what they thought, the set of results I would be getting back from my questionnaire would not be as accurate as they could be if I asked someone who owned a mortgage. .I will try to use as much of my class work as possible. I will need to look at my notes on Demand and Supply. Main AnalysisI will start by looking at the main determinants for the supply and demand.A table to show the main determinants for the supply and demandDeterminants of demandDeterminants of supplyPrice of the good / servicePrice of the good / serviceIncomeCosts of producing the good / servicePrice of substitutes / complementsObjectives of the firmTastesProfitability of alternative productsExpectations of future price changesShocksWith the buying and selling of houses there may also be additional factors that affect people’s supplying or demanding decisions. The main determinants of the demand and supply of houses include:A table to show the main determinants of demand and supply for housesDeterminants of demand for housesDeterminants of supply of housesPricePriceIncome / level of economic activityThe price of landThe level of rentsThe cost of building materialsInterest rates (mortgage rates)Expectations of future price increasesThe ratio of income to house pricesThere are also other factors to take into account that effect the demand for a property, these are .It.s size.It.s age.It.s locationBuying a house takes far more money than most people usually have available, and so they often have to borrow a loan from a bank, building society or other financial institution for the purchase of a house. The loan is usually secured against the property; meaning that if the borrower fails to meet the loan payments the lender can repossess the property to recover their money. There are four main types of mortgage rate:Variable Mortgages: Most mortgages are taken out at variable rates of interest. This means your lender sets an interest rate and from time to time this will be moved up and down in relation to general movements in interest rates in the wider economy. Variable rate mortgages are the ‘plain vanilla’ variety in the home lending market. Fixed Mortgages: These offer borrowers a guarantee of what their mortgage payments will be for a set period of time. An interest rate that does not vary with rates is generally convenient for budgeting. You, of course run the risk that mortgage rates generally will fall below the level at which your mortgage rate is fixed. But equally, you’ll be insulated from any significant upward swing in mortgage rates. These deals have been popular in the U.K. in the early 1990’s after consumers experienced very high home loan rates in the preceding three years. Fixed rate deals often involve the borrower agreeing to a penalty charge – often up to six months interest – if they decide to redeem or repay the mortgage early. In the UK most fixed mortgage rates are fixed for a period of 1 – 10 years, unlike in the USA where it is normal for the rate to be fixed for the entire mortgage term.Discount Variable Mortgages: In the competitive environment among home lenders, there are a variety of offers that promise a discount off the prevailing variable interest rate. In other words, the interest rate on offer is set at a set margin below the standard variable rate. This ‘discount’ may be for a number of years, but in some cases lenders have offered big discounts for short periods of time. E.g. 6% off your home loan rate for six months. These offers are, in a sense ‘too good to be true’. They invariably involve the borrower agreeing to stay with the lender for a period of time or face ‘withdrawal penalties’. Capped Mortgages: This is a variable rate mortgage with a capped limit. An interest rate is charged in line with current prevailing rates, but the borrower is given a guarantee that the rate will not exceed a certain amount. These offers are usually for a limited period. The advantage to the borrower is their mortgage rate can fall but there is a limit to how high it can rise in the event that mortgage rates increase generally.Interest Rates: One of the key determinants of demand for houses is the interest rate because most people finance the buy of a house by borrowing money. A high interest rate means high loan repayments and will therefore restrain the demand for houses. So the lower the interest rate of a loan for a property, the higher the demand for houses because the loan repayments will be lower. At a time when the rate of