Please help me answer the questions, this is Microeconomics subject. Below is the attached case study:

BOX 2.2 UK HOUSE PRlCES From raising the roof to falling through the oor Headlines about UK house prices are commonplace. If we draw up a list of British obsessions we could perhaps add house prices to a list. including the weather, football and the lives of the rich and famous! Sometimes these headlines speak of rapidly increasing house prices and the problems facing households looking to get their feet on the first rung of the housing ladder. At othertimes. the headlines refer to falling house prices and the possibility that some households will be faced with 'negative housing equlty' whereby the outstanding value of a mortgage is greater than the value of the property against which it is secured. These changing headlines reect two important characteristics of UK house prices: (1) their volatility; and (ii) their tendency to rise over the long term. These characteristics can be observed in the chart. House prices in 2008 were some till times higher than back in 1970. equivalent to an annual increase of around about 10.5 per cent. During the same period. consumer prices Increased by the much smaller factor of 10.4 and this equates to an annual increase of 6.4 per cent. The fact that actual or nominal UK house prices have increased more quickly than consumer prices leads economists to talk about an increase in the real price of housing. In other words. the price of housing has increased relative to the average price of a basket of consumer goods and services. House prices have not only grown more quickly than the average price of consumer goods and services. they have also increased more quickly than incomes. Household incomes increased by some 9 per cent a year between 1970 and 2008. some 11/: percentage points less than house prices. While the difference might not seem a lot in a single year. it is quite signicant over time and helps explain why UK house prices increased from around 2'}; times annual income in 1970 to over 4 times annual income in 2008. The chart nicely captures the volatility in house prices. This is done by observing the annual rate of change in house prices. better known as the annual rate of house price ination. There were marked increases in house prices in the early 1970s and early 19805. with annual house price ination rates approaching or exceeding 30 per cent. (in each occasion house price ination rates soon moderated. but house prices continued to increase. We see further very strong growth in house prices in the late 19805. but this time it is followed by house price falls. Indeed. house prices fell in each of the first four years of the 19905. By the end of the 19905 house price inflation picked up again and the UK experienced a protracted period of robust growth. UK house price ination (all houses, all buyers) 60 50 40 30 20 10 0 % annual increase in UK house prices 'IO 20 1970 'l 975 'I 980 1985 1990 1995 2000 2005 2010 Source: Based on data from Department of Communities and Local Government Kl6 But by 2008 the UK was again experiencing falling house prices. It is fair to say that UK house prices have truly been on a roller-coaster ride! The determinants of house prices House prices are determined by demand and supply. If demand rises (Le. shifts to the right) or if supply falls (Le. shifts to the left). the equilibrium price of houses will rise. Similarly. if demand falls or supply rises. the equilibrium price will fall. But why have UK house prices increased over the long term and more quickly than incomes and consumer prices? The answer is that demand has grown faster than supply. And why have we seen such volatility in house prices? The answer here lies in uctuations in demand combined with a stock of housing that changes only slowly. Let us examine the various factors that affected the demand for houses. incomes (actual and anticipated). The second half of the 19805 and from 1997 to 200? were periods of rapidly rising incomes. The economy was experiencing an economic 'boom'. Many people wanted to spend their extra incomes on housing: either buying a house for the first time. or moving to a better one. What is more, many people thought that their incomes would continue to grow. and were thus prepared to stretch themselves financially in the short term by buying an expensive house. condent that their mortgage payments would become more and more affordable overtime. The early 19905 and 2008i9, by contrast, were periods of recession. with rising unemployment and either falling or much more slowly growing incomes. People had much less confidence about their ability to afford large mortgages. The desire for home ownership. Many British households aspire to owner-occupation. This has often been reected in government policies. Two examples include tax relief on mortgage interest payments and the 'rlght to buy scheme' which. Initiated under Prime MinisterThatcher's government in the 19805. gives council tenants the right to buy their property from councils or housing associations. In the 19805. both these policies were believed to have fuelled the growth in housing demand. Tax relief on home loans was subsequently reduced and then removed In April 2000. The cost of mortgages. Interest rates affect the cost of servicing a given mortgage. Debt servicing relates to the repayment of capital and to interest payments. When interest rates fall. the costs of servicing debt fall. This helps to fuel the demand for housing. During the period from 1 99? Interest rates were historically low which enabled people to afford larger mortgages and thus afford to buy more expensive houses. In contrast. at the end of the 19805 and into the early 19905. and again from 2001: to 2008, interest rates were rising. Mortgages were becoming increasingly unaffordable for many people. The availability of mortgages. In the two housing boom periods of the late 19805 and from 1997 to 2007. mortgages were readily available. With house prices rising, banks and building societies were prepared to accept smaller deposits on houses, and to lend a larger multiple of people's income. After all. if borrowers were to default. lenders would still have a very good chance of getting all their money back. in the early 19905. however. and again from 2008, banks and building societies were more cautious about granting mortgages. They were aware that, with falling house prices, rising unemployment and the growing problem of negative equity, there was an increased danger that borrowers would default on payments. Speculation. it belief that house prices will continue to move in a particular direction can exacerbate house price movements. For instance, both in the late 19805 and during much of the 20005 there was a belief that house prices would continue to rise. This encouraged people to buy as soon as possible. and to take out the biggest mortgage possible. before prices went up any further. There was also an effect on supply. Those with houses to sell held back until the last possible moment In the hope of getting a higher price. The net effect was for a rightward shift in the demand curve for houses and a leftward shift in the supply curve. The effect of this speculation. therefore. was to help bring about the very effect that people were predicting (see Section 3.5). In the early 19905. and again from 2008. the opposite occurred. With house prices falling. those thinking of buying houses held back. hoping to buy at a lower price. People with houses to sell tried to sell as quickly as possible before prices fell any further. Again the effect of this speculation was to aggravate the change In prices - this time a fall in prices. Thus speculation tends to increase house price volatility. what happened to UK house prices (a) during the early and middle parts of the 20005; (b) during the late 20005. 2. What similarities exist between the causes of the house price boom and bust of the late 19805/early 19905 and that of the 20005? 3. if actual house prices are rising can real house prices fall? Explain you answer. Q] 1. Draw supply and demand diagrams to illustrate