demand and supply for housing
The determination of prices in local and regional housing markets is a classic example of microeconomics in action! We are seeing the interaction between buyer and seller with prices being offered and agreed before a final transaction is made. In this section we focus on the demand and supply side factors that determine the value of properties in a market.
Each housing transaction in the UK depends on
(a) The price that the seller is willing to agree for their property with the prospective buyer
(b) The actual price that the buyer is willing and able to pay.
Buyers place offers for a property that the seller can either accept or reject
A Sellers Market
When the market demand for properties in a particular area is high and when there is a shortage of good quality properties (i.e. supply is scarce) then the balance of power in the market shifts towards the seller. This is because there is likely to be excess demand in the market for good properties. Sellers can wait for offers on their property to reach (or exceed) their minimum selling price.
A Buyers Market
Conversely when demand both for new and older housing is weak and when there is a glut of properties available on the market, then the power switches to potential buyers. They have a much wider choice of housing available and they should be able to negotiate a price that is lower than the published price.
When the demand for houses in a particular area increases (perhaps because of an inflow of population into the area, or a rise in incomes following a fall in unemployment), there is upward pressure on market prices.
Often the supply of available housing in the market is relatively inelastic. This is because there are time lags between a change in price and an increase in the supply of new properties becoming available, or other homeowners deciding to put their properties onto the market.
When demand shifts outwards and supply is inelastic the result is a large rise in market price and a relatively small expansion of the quantity of houses traded. As supply becomes more elastic over time, assuming the conditions of demand remain unchanged, we expect to see downward pressure on prices and a further increase in the equilibrium quantity of houses bought and sold.
The Aggregate Demand for Housing in the UK
The market for owner-occupied housing is sensitive to changes in market demand and supply. The strength of these factors often explains disparities in house price inflation between and within the major regions of the United Kingdom.
Demand conditions for housing influence both the willingness and ability of people to make house purchases. Some of the most important conditions of demand are listed below
Growth of real incomes - privately owned housing is a normal good for most people. As average living standards rise, the total demand for housing expands, as does the demand for more expensive properties as people look to move "up market".
Consumer confidence - confidence is vital in the housing sector. If expectations for the future performance of the economy deteriorate and people become less optimistic about their own financial circumstances, they are tempted to curtail their search for a new home or delay entry into the owner-occupied sector.
Equally when the economy is enjoying sustained growth and rising prosperity - improved confidence raises the number of home buyers and shifts the balance of power in the market towards the seller if properties are in short supply.
Jobs - because financing a house purchase involves making a long-term commitment through a mortgage lender, changes in unemployment levels exert a significant impact on housing demand. For example in areas when unemployment remains persistently above the national average, average incomes are likely to be lower and confidence among buyers will be negatively affected
These three factors, incomes, employment and confidence are critical in determining the direction of house prices. When these three factors are rising the conditions are normally in place for sharp upward movements in prices. However other economic variables also come into play.
Expectations of future price movements - is housing to be regarded as a consumer durable that provides a flow of services to the owner over a long period? Or should we think of a house purchase, as a major financial investment that we expect will provide us with substantial capital gains in the long run? The answer is probably a mix of the two! Certainly in the 1980s the housing sector boomed because of a strong speculative demand for properties.
Changes to the system of housing taxes and subsidies - government policies affect the housing sector in a myriad of different ways ranging from benefits for council taxpayers on low incomes to the payment of stamp duty on the most expensive properties.
Throughout most of the 1980s and 1990s the government offered home buyers an explicit subsidy in the shape of mortgage interest relief at source or MIRAS. Chancellor Brown decided to phase this subsidy out of the system - MIRAS has now disappeared. The effect has been to dampen down housing demand, but do little substantial to stop house prices rising.
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