Increase in Housing Prices in London
“London House Prices Rise 10pc Amid Bubble Fears” from The Telegraph. Web. http://www.telegraph.co.uk/finance/personalfinance/houseprices/10442990/London-house-prices-rise-10pc-amid-bubble-fears.html
According to this article, the official figures confirm increasingly high rises in the prices of houses in London. This has been attributed to the improved mortgage rates of lending across the UK. The article intends to highlight the factors behind the rising costs of building materials like sand and cement. High transportation cost could also be an additional factor that significantly affects the rising housing prices in the companies. The article will therefore examine the factors that have contributed to the increases of housing prices including the price of cement, price of sand and cost of labor and transportation.
With the rising prices of housing in the UK, cement costs have also soared. Prices of housing units in many countries are directly affected by the cost of building materials and especially. A report from UK regarding cement costs shows that the price of cement for 50 kg increased from RM 16.50 to RM 17.70. Since cement makes up for almost 70 to 85 per cent of the building materials used in constructions, the rise in its costs also affects the prices of other materials as well. One of the organization that handles the prices of materials, Residential Property Builders, assert that the increased cost of cement would lead to increased property prices because cement is a core material that is used in the production of bricks as well as concrete blocks. While the rise in the price of cement is bound to affect the cost of purchasing property in the UK, this will not necessarily translate into higher prices for residential properties in some locations. Increased cost of cement in the country will only influence the prices of property in the UK.
Besides cement, getting sand in the UK has become quite a challenge hence resulting in increased prices of houses in the country. Like the cost of cement, the price of sand also directly affects property prices and reports indicate increases that range between RM40 to RM 43 per yard. This is double of growth in the previous period, during which price of sand per ton increased from RM 20 to RM 21. In general higher costs of both cement and sand have resulted in the current increase in charges of housing. Furthermore, there has been a rise in the wage demand from RM 30 to RM 35 per day in the current year and this rise was created by the deficit of workers in the country. In order to conduct operations, construction companies had to call in foreign workers to bridge the shortage gaps and also raise the wages to retain the work-forces.
Apart from the cost of sand and cement or even the wage rises in UK, transportation and labor costs have also simultaneously been on the upward trend. There was a rise from RM 400 per loaded truck to current RM 450 per truck in the transportation costs. Relevant graphs will be used to depict the upward trends of prices of properties in UK, that have resulted from the increase in the cost of cement, labor as well as transportation. By employing the relevant microeconomic theory analysis readers can easily fathom the factors that trigger the increase prices of properties.
How Cost of Production Affect the Price of Properties?
If the cost of production increases, then the supply automatically goes down, and this is why with the increase of the price of cement, wages, sand and the transportation charges, the supply of buildings from the housing developers has decreased and subsequently resulted in a shift in the supply curve inwards from SO t0 S1. Q0 represents the quality of building constructed when the conceding price is at P0. In order for the shift of the supply curve to S1 and subsequent meeting at the equilibrium point of balance, E1, to occur, the level of supply must be lowered from Q0 to Q1 so that it can trigger the prices to increases from P0 to P1 and reduce the shortages of property supply in the market. This therefore reveals the relationship between cost of production and the level of supply of properties whereby an increase in the prices of production triggers the overall rise in the cost of properties.
Methods to reduce the Price of Properties using Microeconomic Theory
- Imposition of subsidies
The graph is a depiction of how imposing subsidies can affect the costs of production. Imposing subsidies catalyzes developers to invest in more properties especially is there is a decrease in construction costs from P0 to P1. Imposition of subsidies helps to reduce the production of costs and this is evident from the supply curve that shifts outwards form SO to S1 which in essence implies that the increase in the number of properties constructed in the markets from Q0 to Q1.
Additionally, the increase in construction and supply of properties from Q0 to Q1 also leads to a shift of the supply curve from S0 to S1 in the markets. On the other hand, the decrease in prices of properties from P0 to P1 subsequently follows the increase in the amount of properties within the housing market.
Imposition of Price Ceiling on the production costs
The maximum price of a certain product that is set by the government authorities is usually referred to as the price ceiling. This price ceiling acts as a cap to the prices below the balance of the price and quantity and governments may be compelled to impose such price limits in the event that it ascertains that the price at equilibrium is too high. As a result, the price ceiling limits the costs to be charged on the building materials, labor and transportation. In case price ceilings are set by the UK government, developers will construct Qs while the demand for properties will be at Qd. This will result in reduced supply of materials, workers as well as transport in the housing markets. Nevertheless, the construction companies can bridge such shortages by importing production factors from other countries.
When the cost of production reduces, the supply curve will shift from S0 to S1, and this is attributed to the fact that the production costs ultimately affect the supply of the building by developers. An increase of supply from Q0 to Q1 will be experienced if the production costs are decreased. Where quantity of peripheries constructed goes up, there will be a reduction in the price of the properties which will cause a shift from P0 to P1. Moreover, several economic experts have expressed their concern regarding house prices bubble in the country which are an indication of increased lending trends. Housing prices and the number of transactions are important factors that can be used to predict the future housing cost trends in the London Market.
When the the costs of production are raised, price of properties also increase and numerous economic approaches can be taken by the authorities in a bid to lower the price of the properties. Imposition of subsidies on the production costs is one such approach which can help to minimize the burden of production. Additionally, setting up a price ceiling for the property developers is a tactic that can help to lower the cost of production. Employing such approaches, can encourage properties developers to construct more properties and even lower the costs of the properties. The London market housing price bubble is a challenge for first time buyers and a decrease in the price of properties will make them affordable to more people hence encourage them to have their own properties.
Blackmore , Nicole “London House Prices Rise 10pc Amid Bubble Fears.” The Telegraph. 12 Nov 2013. Retrieved from <http://www.telegraph.co.uk/finance/personalfinance/houseprices/10442990/London-house-prices-rise-10pc-amid-bubble-fears.html>