The Housing Market: Supply and Demand

Importance of the Housing Market

• Houses are typically the most valuable asset owned by individuals.
• The Bank of England monitors the housing market due to its economic impact.
• The housing market employs many people and is a significant part of GDP.
• Changes in house prices influence consumer spending and the overall economy.

Key Stakeholders in the Housing Market

• Homeowners: Selling properties or buying new ones.
• Renters: Divided into private and social renters.
• Investors: Buy/sell properties for investment.
• Contractors/Renovators: Involved in building and modifying homes.
• Estate Agents: Facilitate property transactions.

Economic Impact of the Housing Market

• House prices affect consumer spending; they account for two-thirds of Britain's economic activity.
• Wealth Effect: Rising house prices increase consumer confidence and spending.
• Declining house prices lead to reduced confidence and spending, potentially causing negative equity.
• Mortgages are the largest source of debt; high mortgage debt can reduce spending during uncertainty.
• Housing investment impacts GDP through:
  • New Builds: Directly contribute through investment in land, materials, and jobs.
  • Existing Homes: Contribute through fees, removal costs, and new furniture.

Factors Affecting Demand and Supply

Demand

• Real Incomes: Increase leads to higher demand.
• Mortgage Costs: Higher interest rates decrease demand.
• Credit Availability: Easier borrowing increases demand.
• Economic Growth: Increases in wages boost demand.
• Population Changes: More people or single households increase demand.
• Employment: Higher unemployment reduces demand.
• Consumer Confidence: Optimism leads to higher demand.

Supply

• Production Costs: Higher costs reduce supply.
• Government Policy: Taxation and subsidies affect supply.
• Construction Companies: More companies usually mean more supply.
• Technology/Innovation: Advances make building cheaper and increase supply.
• Government Spending on Social Housing: Can increase supply.

Price Elasticity of Supply

• Short-term supply of new housing is price inelastic due to long build times and reliance on skilled labor and materials.
• Changes in demand significantly affect prices due to inelastic supply.

Current UK Housing Market

• Despite economic challenges, house prices have risen post-lockdown.
• July marked the busiest month in over a decade for the market.
• Factors include favorable mortgage rates, a stamp duty holiday, and lifestyle changes from lockdown.
• Concerns remain about the sustainability of this growth amid a deep recession.
• Historical trends show that recessions and house price drops are interconnected.

Conclusion

• Understanding supply and demand in the housing market is crucial for economic predictions.
• Current growth may be driven by pent-up demand; future prices remain uncertain amid economic downturns.

Questions

1. Explain the short-term inelasticity of housing supply.
2. Discuss policies to increase the responsiveness of house building to demand.
3. Analyze the impact of increased unemployment on housing demand and prices.
4. Describe how house price changes affect macroeconomic objectives.