House prices in the UK, by April, were 9.9% more expensive compared to a year ago, according to official figures. This rise in house price is considered by many as beneficial to the economy however this is not entirely true as it does not benefit everyone.
Price level S S1 P1 P D1 D Q Q1 Quantity of homes
The diagram above shows how the demand and supply for houses can increases the price level. The demand curve, in the diagram, shifts to the right from D to D1 and the supply curve shifts from S to S1. Price level in turn rises from P to P1 which increases the quantity of homes from Q to Q1. Supply increases but no to the extent of demand and therefore the price of homes increases.
A reason house prices in the UK have been increasing in the last few years is linked to the supply and demand of homes. As a nation we do not build enough houses to keep pace with a growing population. Since 1982 the population has steadily increased. Rising divorce rates have created a need for more single-person homes. There was also an estimated net flow of 212,000 long-term migrants to the UK in the year ending September 2013, a statistically significant increase from 154,000 in the previous year. This rise in population, for the various reasons, means that not enough houses are being built hence supply does not meet demand pushing the price level up. In addition when it's relatively inexpensive to borrow money, such as when interest rates are low, more people may try to qualify for mortgages. Also, improvements in the UK economy will mean more homebuyers as the unemployment rate will decrease and therefore people will feel more confident and may be choose to buy a house. Lower interest rates combined with greater numbers of people with jobs can convince lenders to give more mortgage loans, increasing the number of homebuyers increasing demand and therefore price.
Home owners in the UK make about 70% of the population. In this sense rising house prices will benefit the economy as the majority of the population gains from this rise. They benefit from the wealth effect as their houses are worth more. This will lead to a rise in consumption and net export as they feel wealthier. This will have a positive effect on the economy as aggregate demand will increase and in turn so will real gdp leading to actual economic growth. However this increase in real gdp does not mean gdp per capita increase and this true as only the rich or the home owners will benefit from the wealth effect
The old, particularly, also benefit from the ability to realize the capital in their house. They can and in retirement often do downsize to a smaller house and use the money realized to fund a more comfortable old age.
On the other hand some may argue that the rise in house price is not beneficial to society. The 30 per cent of the population who don't own a house do not, the young and those who overstretch themselves with a mortgage that is too big are all made worse off due to rises in house prices
Those too poor to own a house rent either privately or from their local council. They find it much harder to move house than homeowners do. As house prices rise, they find it increasingly difficult to get out of this poverty trap and climb onto the property ladder. Since house prices are rising faster than wages they find it even harder
Young people find it increasingly difficult to get their first foot on the ladder too. Those who are taking on their first property mortgages are stretching themselves more and more to take out that first loan. The average…