The demand for houses

An increase in the demand for houses can be caused by:

·        Income – rapidly increasing incomes tend to cause significant increases in the demand for houses.

·        Desire for home ownership – there is a certain status associated with home ownership.

·        Cost of mortgages – if the cost of mortgages are low then demand for houses will increase.  This can be caused by low interest rates, good fixed rates, discounted interest rates etc.

·        Availability of mortgages – at certain times financial institutions may make it easier to obtain a mortgage.  Examples include allowing people to borrow more, cash back schemes and 100% mortgages.

·        Price expectations – a big influence on demand is if people believe that houses prices will continue to rise.  People thus believe that if the buy now they can sell at a profit later.  This has led to many people buying houses with the intention of letting them out and making a capital gain on the property.

This has lead to the Abbey National believing that now is a cheaper time than ever to buy a new home.

The supply of houses

In the short term the supply of houses is relatively inelastic since it is very difficult to bring new houses on to the market.  In the longer term supply can be influenced by:

·        Costs of production – building costs such as price of land a wages can shift supply to the left.

·        Government regulation – new government regulations can severely restrict the number of house being constructed.

·        Council house sales – in the 1980’s the government encouraged people to purchase their council houses.

Effects on equilibrium

The diagram below shows the effect of an increase in demand on the price of houses with an inelastic supply curve:

Any increase in demand means only a small short term increase in supply but a relatively large increase in price.

Rent controls

The reason for the government to have rent controls is to provide cheap rented accommodation for the very poor.  The effect can be seen on the following diagram:

The rent control is an example of a maximum price, which brings down the cost of renting a house (R₂).  There are however a few problems as a result:

The quantity of rented accommodation available falls to Q_s.

There is now a shortage of rental accommodation equal to Q_d – Q_s.

In the longer term landlords may opt not to rent out their accommodation and sell it instead, because their profits have fallen due to the lower rents now available.  This will bring about a further fall in the availability of rented accommodation and therefore an even bigger shortage.

Further Reading

Workers are being priced out of their local housing market
UK houses affordable says bank