Demand

Firstly, I will deal with the factors which can affect the demand for houses in an economy.In many people's opinion, the single most important factor which affects demand for housing is interest rates. This belief is held because for most people, the cost of purchasing a house is so great that the only way they can afford to do so is to take out a mortgage from a bank or building society. One of the main conditions that banks and building societies apply to mortgages is that during the course of the mortgage, interest will be paid on the loan. Although it is possible to have a fixed rate mortgage - where the rate of interest which will be paid is fixed at a constant level throughout the mortgage- most mortgages are variable rate mortgages, where the amount of interest which will be paid varies throughout the mortgage [1]. By increasing interest rates, the government can control how much money people have in their pockets. The variance of interest rate can be used to control much of the economy, including inflation. This is known as monetary fiscal policy. Interest rates have such a large affect on the economy because such a large percentage of the population has a mortgage and so is vulnerable to interest rate rises. An increase in interest rates can greatly increase the amount of money that a household has to pay each month. If people without a mortgage who are considering taking one out to cover the cost of a very expensive purchase see that interest rates are high then they are likely to be wary of taking out a mortgage, as they know that they will have to pay a greater amount of extra money each month. Because people may be put off taking out mortgages, they will be unable to purchase a house, so this will cause demand for houses to fall. This is known as a slump in the housing market.

Conversely, if people see that interest rates are low and they are considering the possibility of purchasing a house, they may decide to go ahead with their purchase due to the fact that it will be more affordable- at least in the short run- due to the lower interest rates.

Variable rates will also make mortgagors vulnerable to fluctuations in interest rates as even small changes in the interest rate can have a big effect on the outgoings of those with large mortgages. When rates rise steeply, one likely result is an increase in the number of mortgagors who cannot afford to make their monthly payments under the mortgage agreement and who fall into arrears. If this happens, in time, unless the agreement is renegotiated, the mortgagee may choose to exercise its right to take possession of the property (repossession), with a view to selling it and recovering all monies outstanding under the mortgage agreement; any amount the sale raises above that which is owed to the mortgagee belongs to the mortgagor. However, a high number of repossession actions is one factor that contributes to a slump in the property market, which may mean that sale price will not even cover the outstanding amount.

Another factor which can affect the demand for housing is unemployment. High unemployment tends to lead to a decrease in demand for houses for several reasons. The main reason for this is that because in a period of increasing unemployment, job security tends to be lower than at a time of decreasing unemployment [2]. This means that if people cannot be sure that they are going to have a regular monthly income for a long period of time, they are unlikely to take out a large mortgage on which there is a high probability that they will be unable to make all of the repayments. If enough people