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. 

ELASTICITY OF SUPPLY

ELASTICITY OF SUPPLY

Elasticity of supply measures the change in the amount that a firm supplies in 

response to a change in price. It is measured as follows

percentage change in quantity supplied / percentage change in price

Again the Q is on top, remember QPR.

VALUES OF PRICE ELASTICITY OF SUPPLY

•  Elasticity is greater than one - the good is elastic and is highly 

responsive to changes in price. A percentage change in price leads to 

a larger percentage change in the quantity supplied. A straight line 

supply curve will intersect the price axis.

•  Elasticity is equal to one - the good has unitary elasticity, a percentage 

change in price will lead to an equal percentage change in the quantity 

supplied. Any straight line supply curve that intersects the origin will 

have unitary elasticity.

•  Elasticity is less than one - the good is inelastic and not very 

responsive to changes in price. A percentage change in price leads to 

a smaller percentage change in quantity. . A straight line supply curve 

will intersect the quantity axis. 

•  Elasticity is equal to zero - the good is perfectly inelastic and a change 

in price lead to no change in the quantity supplied.

•  Elasticity is equal to infinity - the good is perfectly elastic and any 

decrease in price will cause the quantity supplied to fall to zero. 

The different supply curves are shown below: 

DEMAND AND SUPPLY

                                             DEMAND

Our wants become a demand when we have the money to back up our 

desires. We call this effective demand, i.e., how much consumers will be 

prepared to buy at a particular price.  

Assuming ceteris paribus, as price increases demand will fall and as prices 

decreases demand will rise. This leads to a downward sloping demand curve.

A change in price will lead to a movement along the demand curve. An 

increase in price will lead to demand contracting and a decrease in price will 

cause demand to expand 

A number of factors will cause the demand curve to shift, either to the right 

(increase in demand) or left (decrease in demand): 

•  Income - when income rises demand for a normal good will also rise.

•  The price of other goods - if the price of a substitute good falls then 

demand will fall (e.g., Coca-Cola and Pepsi). If the price of a 

complement good falls then demand will rise (e.g., computers and 

computer games). 

•  Population - an increase in population is likely to lead to an increase in 

demand. 

•  Changes in fashion - as goods go out of fashion demand for them will 

fall.

•  Changes in legislation - e.g., demand for gun in the UK decreased 

after it became illegal to own one.

•  Advertising - this aims to influence consumer choice.

•  The time of the year - e.g., demand for holidays in Spain will be lower 

in the winter and demand for gas will be higher during the winter. 

                                             SUPPLY

If the price of a good increases, ceteris paribus then firms are likely to be 

more willing to supply larger amounts. This leads to an upwards sloping 

supply curve. A change in price will lead to a movement along the supply 

curve, whilst a change in any other factor will lead to a shift in the supply 

curve.

We are able to identify two main reasons for the supply curve being upwards 

sloping: 

•  Incentives for increasing production - if the price of particular good 

rises then producers will find it more financially rewarding to devote 

resources to that good and away from others.

•  Theory of increasing costs - due to the increasing opportunity costs of 

production as less and less well suited resources are switched to it, a 

higher price must be available in the market place to make it 

economically viable to use these resources.