Economics help blog – Page 36

Why are UK house prices so high?

17 July 202210 May 2022 by Tejvan Pettinger

In recent years, we have had a devastating global credit crunch, the longest and deepest recession since the 1930s and then the impact of Covid. Yet, despite this financial and economic upheaval, UK house prices have bucked the trend, avoided a major collapse and now exceeded pre-crash levels. The economics of Covid have even made …

History of Inflation in UK

12 June 20221 May 2022 by Tejvan Pettinger

The UK has avoided any situation of hyperinflation. The highest rates of inflation were after the Napoleonic War in the early nineteenth century. During the First World war (25%) and in the 1970s where inflation rose due to a rise in oil prices and strong wage growth.

After the late 1980s inflation was brought under control, inflation remained for nearly two decades – during a period known as the great moderation. However since 2008 we have seen periods of cost-push inflation, most notably in 2022, with inflation rising close to 10% due to rising oil, gas and food prices.

Inflation means an increase in the general price level and has the effect of reducing the value of money. Rising prices mean money buys less than it used to. See: Definition of Inflation

Inflation since 1860

historical-inflation-1860

Inflation 1949-2015

How the housing market affects the economy

25 February 202324 April 2022 by Tejvan Pettinger

A look at how the housing market and changes in house prices affect the rest of the economy. In summary: Rising house prices, generally encourage consumer spending and lead to higher economic growth – due to the wealth effect. A sharp drop in house prices adversely affects consumer confidence, and construction and leads to lower …

Historical UK national debt

11 July 202217 April 2022 by Tejvan Pettinger

Click to enlarge National debt (public sector debt) is the total amount of liabilities the government owe to the private sector (plus liabilities held by Central Bank). National debt is typically bought by domestic private sector (banks, insurance funds, pension funds) and foreign investors (foreign banks) Recently some has been bought by the Bank of …

Factors that affect the housing market

20 September 202215 April 2022 by Tejvan Pettinger

The housing market is influenced by the state of the economy, interest rates, real income and changes in the size of the population. As well as these demand-side factors, house prices will be determined by available supply. With periods of rising demand and limited supply, we will see rising house prices, rising rents and increased risk of homelessness.

Factors determining house prices

Main factors that affect the housing market

Economic growth. Demand for housing is dependent upon income. With higher economic growth and rising incomes, people will be able to spend more on houses; this will increase demand and push up prices. In fact, demand for housing is often noted to be income elastic (luxury good); rising incomes leading to a bigger % of income being spent on houses. Similarly, in a recession, falling incomes will mean people can’t afford to buy and those who lose their job may fall behind on their mortgage payments and end up with their home repossessed.
Unemployment. Related to economic growth is unemployment. When unemployment is rising, fewer people will be able to afford a house. But, even the fear of unemployment may discourage people from entering the property market.

Interest rates. Interest rates affect the cost of monthly mortgage payments. A period of high-interest rates will increase cost of mortgage payments and will cause lower demand for buying a house. High-interest rates make renting relatively more attractive compared to buying. Interest rates have a bigger effect if homeowners have large variable mortgages. For example, in 1990-92, the sharp rise in interest rates caused a very steep fall in UK house prices because many homeowners couldn’t afford the rise in interest rates.
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Policies to reduce cost-push inflation

11 July 20226 April 2022 by Tejvan Pettinger

Cost-push inflation is caused by higher costs of production, such as rising oil prices, higher nominal wages, and increased commodity prices. To reduce this kind of inflation, the government can pursue deflationary monetary policy and/or supply side policies. But, in truth, it is difficult to reduce cost-push inflation because higher interest rates are likely to …

The impact of supply bottlenecks on world economy

5 April 2022 by Tejvan Pettinger

Bottlenecks refer to the situation where firms are unable to meet demand because of delays, shortages and lack of spare capacity. Bottlenecks can occur from a spike in demand or disruptions to supply. They can lead to higher prices, inflation, shortages of goods and even lower economic growth. For many years, we have grown accustomed …

Inflation tax

4 April 2022 by Tejvan Pettinger

“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily,” John Maynard Keynes, “The economic consequences of the peace” Inflation tax is an implicit tax on nominal assets, such as cash, bonds and …