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Firstly, I will deal with the factors which can affect the demand for houses in an economy.In many people’s opinion, the single most important factor which affects demand for housing is interest rates. This belief is held because for most people, the cost of purchasing a house is so great that the only way they can afford to do so is to take out a mortgage from a bank or building society. One of the main conditions that banks and building societies apply to mortgages is that during the course of the mortgage, interest will be paid on the loan. Although it is possible to have a fixed rate mortgage - where the rate of interest which will be paid is fixed at a constant level throughout the mortgage- most mortgages are variable rate mortgages, where the amount of interest which will be paid varies throughout the mortgage [1]. By increasing interest rates, the government can control how much money people have in their pockets. The variance of interest rate can be used to control much of the economy, including inflation. This is known as monetary fiscal policy. Interest rates have such a large affect on the economy because such a large percentage of the population has a mortgage and so is vulnerable to interest rate rises. An increase in interest rates can greatly increase the amount of money that a household has to pay each month. If people without a mortgage who are considering taking one out to cover the cost of a very expensive purchase see that interest rates are high then they are likely to be wary of taking out a mortgage, as they know that they will have to pay a greater amount of extra money each month. Because people may be put off taking out mortgages, they will be unable to purchase a house, so this will cause demand for houses to fall. This is known as a slump in the housing market.
Conversely, if people see that interest rates are low and they are considering the possibility of purchasing a house, they may decide to go ahead with their purchase due to the fact that it will be more affordable- at least in the short run- due to the lower interest rates.
Variable rates will also make mortgagors vulnerable to fluctuations in interest rates as even small changes in the interest rate can have a big effect on the outgoings of those with large mortgages. When rates rise steeply, one likely result is an increase in the number of mortgagors who cannot afford ...

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... of their home being repossessed increases. If a large number of homes are being repossessed, people will be put-off purchasing a house. Also, people who are considering taking out a mortgage will be less likely to do so because they will be less able to afford it due to the fact that they are paying more tax. Both of these effects are likely to cause a slump in the housing market.
Conversely, if tax rates are low the state of the housing market will improve due to the fact that people will feel that they are more able to afford the added cost of a mortgage. However, if they take out a mortgage at a time when tax rates are low, there is always the possibility that tax rates will increase at a later date.
[1]The interest rate is set by the lender, but it is usually in line with the rate set by the Bank Of England, which is turn is likely to respond to changes in the interest rates of the main world banks, most of which are in America.
[2]This is because there is a large labour pool from which to draw replacement workers. However, there are exceptions to this rule, for example people in the professions like doctors and lawyers tend to have a high degree of job security at all times.
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