Demand Analysis: The demand for housing is often described as being highly cycli

Question

Demand Analysis: The demand for housing is often described as being highly cyclical and very sensitive to housing prices and interest rates. Given these characteristics, describe the effect of each of the following in terms of whether it would increase or decrease the quantity demanded or he demand for housing. Moreover, when price is expressed as a function of quantity, indicate whether the effect of each of the following is an upward or downward movement along a given demand curve or involves an outward or inward shift in the relevant demand curve for housing. Explain your answer.

A. An increase in housing prices

B. A fall in interest rates

C. A rise in interest rates

D. A severe economic recession

E. A robust economic expansion

Explanation / Answer

A. An increase in housing rates: It will lead ot contraction in demand of housing as lesser people will be willing to buy houses at higher price. it is in accordance with the law of demand.

b) A Fall in interest rates: It will lead to increase in demand and shift demand curve ot the right. It is so because interest is the opportunity cost of money to be invested in housing. If a person has to borrow money to buy a house, his cost of borrowing decreases with decrease in interest rates. If he has his own money, then decrease in interest rates means that he will have to forgo less interest to buy housing. It will lead to increase in demand for housing.

c) A rise in Interest Rate: It will lead to decrease in demand and shift demand curve to the left. It is so because interest is the opportunity cost of money to be invested in housing. if a person has to borrow money to buy a house, his cost of borrowing increases. If he has his own money, then increase in interest rates means that he will have to forgo more interest to buy housing.

d. A severe Economic Recession: During recession, demand for housing decreases as people do not want to block their money and they are also doubtful about fall in property rates which means a greater probability of incurring losses.

e. A robust Economic expansion: During expansion, demand for housing increases as people have an expectation that property rates will jump soon and in short run they will be able to make huge profits through investment in property.

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