Question

Expenditure on housing is one of the major expenses individuals face in their lifetime.

However, over the last 20 years, housing prices have fluctuated quite considerably. You have been hired by a consumer affairs think-tank and tasked with producing an economic analysis explaining economic reasons why housing prices fluctuates over time (last 20 years) and its impact on relevant markets in the economy. Finally discuss some of the welfare implications (think of consumer and producer surplus) of changes in housing prices.

Answer 1

House, something we all desire for our own and family, is one of the basic necessities of life, and is also a major expense factor in the life of an individual. Since, houses are not cheap and readily available everywhere, they attract huge attention globally. We have seen in the last couple of decades that although prices have increase over time, but there have been quite a few fluctuations in the market, and there have been a huge fall in the housing prices twice in the last two decades, from 1990 to 1992 and also from 2007 to 2010. During these two periods, the markets saw a shocking fall in the prices of the houses. If we analyze the causes of such heavy fluctuations, we will come across certain core causes which dominate the world real estate market. Let is briefly discuss some of these critical causes of huge global fluctuations in the housing prices.

                                  The primary factor that caused the fluctuations is the geographical pattern of the area. This is perhaps a critical factor that determines the response of the housing prices to average or high market shocks. In the last two decades it has been seen that prices of those geographical areas have increased sharply, which are densely populated and centers of major economic and financial transactions. When there is a huge market shock, such as a huge decline in the availability of capital in the market or a recession, the housing prices of such geographical locations tend to lower down, but a very flat rate. Even during high shock periods, the tendency of the fluctuation in such highly developed financial centers are very low. However, on the contrary, the fluctuation of housing prices in a low economically developed or a lesser infrastructurally developed area takes a volatile stand. Even with the slightest of fluctuations in other factors. The housing factors assume huge fluctuations. For example, in a far-off village, where the prices of the houses are anyway very cheap, a small factor such as the availability of small developing market in the locality will increase the prices to a huge extent and the removal of water supply connection line may reduce the pricing of the houses to very low level.

                               There are always national factors such as the condition of the economic development of a country that highly affects real estate prices. For example, a poor economic development of a country, will mean that the prices of the houses will generally go down. Prices of the construction materials and their inflationary price rise also effects the housing prices. Another critical factor that determines the fluctuations in the real estate market is the availability of money in the economy. With a larger availability of money among the people, their demand rise exuberantly and thereby rises the price of the housing sector. Here, it is critical to note that, the availability of unaccounted or so-called Black money, is another key factor determining the housing prices. With large black money circulating in the market, there is a high probability that the housing prices will always be very high.

                             International factors have also been a huge contributor to the fluctuations in the market prices of the houses. We have been that due to the high rise of fuel in the international market, the cost of importing of transferring goods and services highly increases in a market, thereby increasing the cost of construction of the houses, and thereby increasing house rates. Similarly, a natural calamity or an emergency also steepens the real estate prices. We can see that after the 2004 Tsunami, the price of real estate sector in Japan and nearby Asian countries highly aggravated.

                           Due to the increase in the housing prices, the welfare of the producers or the construction companies, increases highly, whereas, the welfare of the public decreases, as they are now required to pay highly increased prices for the houses. Similarly, Due to a decrease in the housing prices, the welfare of the producers or the construction companies, decreases heavily, whereas, the welfare of the public increases, as they are now required to pay much lesser prices for the houses. However, her must calculate the inflation and its effects. Welfare will increase for the producers or the buyers, if the benefit they are getting from selling or buying the houses is greater in proportion or comparison to the overall inflationary price rise.