THE HOUSING MARKET

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. 

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 Qs. 

There is now a shortage of rental accommodation equal to Qd – Qs. 

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.