My final research blog will focus on an important sub question related to my inquiry question. My sub question is What causes housing prices to rise and how a change in the economy could impact the price of a house.
The cause of housing prices is a complex question with many different factors determining its price. The first factor is one I mentioned in blog post 4, which was the wealth effect. The wealth effect is the demand for housing, for example during a time when there is high economic growth the demand for a house would increase, therefore the value of a house would increase (1). Vice versa if a recession were to happen then because of declining economic growth consumers will save money instead of buying houses lowering the demand for houses (2). One important factor affecting the change in housing is supply, as I mentioned previously in prior blogs building a house is a lengthy and expensive project because of that it takes time to increase the supply of housing which results in the ludicrous pricing we see in Canada today.
Another factor driving up house prices is interest rates, now I haven’t really touched on the subject of interest, so I’ll start simple. Interest is the cost of borrowing money decided by the lender.(3) For example, if you borrow 1000 dollars from a bank, you’ll have to pay them back 1030 at the end of the year(3%). The reason interest effects housing prices is because of mortgages. Mortgages are loans you take to buy a house, after that you pay it back over the course of a few years or decades. Almost everyone takes a mortgage to finance a house resulting in interest rates being an important factor affecting house prices(4). Imagine this, you bought a house during 2023 when interest rates were at an all time high, the average cost of a house(single family house) is 938,000. With the interest rate at 6 percent you would have to pay an extra 61,000 a year. This is why the interest rate is such an important factor for housing prices, it’s the difference between paying 61,000 more a year as opposed to 46,000(interest rate in 2024)(5).
In conclusion, this is how the economy affects housing prices and how changes in the economy indirectly or directly affect housing prices. This is also my final research post so if you ‘ve read my previous blog posts then thank you.
Sources
1.)Pettinger, T., Thole, Lewis, Thomas, Toby, & O, E. (2022, September 20). Factors that affect the housing market. Economics Help. https://www.economicshelp.org/blog/377/housing/factors-that-affect-the-housing-market/
2.)Team, T. I. (n.d.). Recession: What is it and what causes it. Investopedia. https://www.investopedia.com/terms/r/recession.asp
3.) Chen, J. (n.d.). Interest: Definition and types of fees for borrowing money. Investopedia. https://www.investopedia.com/terms/i/interest.asp
4.)Nielsen, B. (n.d.). How interest rates affect the housing market. Investopedia. https://www.investopedia.com/mortgage/mortgage-rates/housing-market/
5.)Pettinger, T., & ives, L. (2021, September 10). House prices and interest rates. Economics Help. https://www.economicshelp.org/blog/10942/housing/house-prices-and-interest-rates/
