Question

Economic growth in the country of Southville has slowed down in the last few months. Following a collapse in housing prices, several homeowners have defaulted on their mortgages. Given that this sector accounts for a sizeable portion of the GDP. many commentators believe that this will prompt a 'domino effect' in the economy. On a TV chat show: three industry experts are discussing the crisis and its possible impacts. Megan Greenboe is of the opinion that housing prices were driven up by speculation prior to the crisis. According to her, this crisis will eventually reduce liquidity in the economy and lead to a credit crunch. Bob Sacberg, however, does not agree with Megan. Bob feels that the increase in housing prices can be explained by the steady growth in population and were therefore driven by fundamentals. Samantha Morris meanwhile is not very convinced that the housing sector is solely responsible for the economic slowdown. She argues that a twelve percent fall in housing prices is unlikely to have a very widespread impact. Which of the following, if true, will weaken Bob's argument that fundamental factors in the housing market led to the increase in housing prices?

a. According to census data, the percentage of Southville's population that lives in rural areas has gradually been shrinking
b. The standards for obtaining a mortgage loan in Southville have been more stringent compared to many other countries
c. Prior to the crisis, the prices of existing homes also increased in proportion to the prices of new homes in Southville
d. A large proportion of home buyers in Southville were individuals who already owned one or more houses
e. The inflation-adjusted real wage in the construction industry increased by 10 percent prior to the crisis

Answer 1

D) A large proportion of home buyers in Southville were individuals who already owned one or more houses

Step-by-step explanation:

Bob argues that the price of houses in Southville increased because more the population, so more people equals more demand for houses, and more demand equals higher prices. But if many of the new houses were not primary residencies, then Bob's argument collapses. This would mean that the higher price for houses was not caused by fundamental factors, but is probably due to speculation.