Housing is a crucially important industry in the economy. Directly and indirectly it employs huge numbers of people and accounts for a sizeable percentage of the value of GDP. In microeconomics we are asked to apply supply and demand concepts in understanding price differentials and price changes. The UK housing industry is widely regarded as a cause of several market failures and there is structural shortage of affordable properties in both the owner-occupied and rented sector. Can appropriate government interventions improve the outcome for consumers and producers or might they lead to instances of government failure. This is a good market to apply your AS micro theory!

1. Aspects of the UK Housing Market

2. Markets in Action
Aspects of the UK
Housing Market

3. The Demand for Housing
1. Real Incomes: As living standards rise, demand for most types of
housing increases
2. Mortgage Interest Rates: A rise in mortgage rates increases the cost of
financing the loan on the purchase of a property.
3. Consumer confidence. If people become less optimistic about they
may be tempted to delay a property purchase
4. Economic Growth: When the economy has sustained growth and
rising prosperity, housing demand and prices tend to rise
5. Unemployment: If unemployment is high, incomes are lower and
limiting the number of people who are able to afford properties.
6. Price of Substitutes: For people wanting to buy their own home, the
main alternative is to rent – so a higher cost of renting could lead to
an increased demand for owner-occupied homes
The demand for housing is the quantity of properties homebuyers
are willing and able to buy at a given price in a given time period

4. The Supply of Housing
Housing supply is the flow of properties available at given price in a
given time period. Supply will be a mix of new and older housing
• The main conditions of supply in the housing market are:
1. Costs of production for construction companies
– Employment costs (including wages, overtime payments and
employment taxes).
– Costs of purchasing land for housing development.
– Costs of purchasing building components and raw materials.
– Costs associated with achieving planning consent
2. Number of construction companies and their objectives.
3. Extent to which property builders achieve economies of scale
4. Amount of innovation achieved in the house-building industry
5. Government taxation and subsidy of new housing developments
6. Government spending on the building of new social housing

5. Price Elasticity of Supply of Housing
• Reasons for low PES
• Production time frame:
• It can take years for a
project to be completed
• Delays in the housing
planning process
• Limited spare capacity and low
stock levels:
• Supply is often restricted by
shortages of skilled labour
such as bricklayers,
electricians & plumbers
• Other factor inputs used in
construction such as
cement, bricks may be in
scarce supply
Price
Quantity of Housing
P2
P1
Q1
S1
Q2
D1
D2
The supply of new housing is inelastic in the
short run. Therefore, house prices are
determined mainly by demand factors

6. Market Failure in Housing
Markets fail when they fail to reach a socially efficient/equitable outcome.
Information Gaps
(Asymmetric)
Empty Housing &
Homelessness
Inequalities of
Wealth (Widening
Property Divide)
Externalities in the
building industry
Labour Immobility
due to high prices
Chronic Under-
Supply of Homes

7. Should Private Sector Rents be Capped?
Discuss the view that a maximum rent should be set for all privately
rented housing in the UK
Qty
R1
Q1
D
Rent
Ceiling
Rent
Q3
S
Q2
• Rent ceiling must be set below
private sector rents to be effective
• It makes rented property more
affordable for some tenants.
• This may help to reduce inequality
and prevents exploitation by
profiteering landlords
• But it creates excess demand for
rented property. Fewer private
landlords see renting as profitable
and the rented housing stock falls
(creating more shortages)
• Illegal markets may develop in the
rented property market.
• Much depends on the severity of a
rent cap – the impact will vary across
regions (e.g. London versus Wales)

8. Analysing / Evaluating Policies to Raise Housing Supply
Policy options Analysis Evaluation
Builders given tax incentives to
build new houses
Increases profitability
from construction –
stimulates investment
Might be more effective to
tax undeveloped land – i.e.
reduce “land banks”
Simplify planning process
Shortens the time frame
for building
Might cause worsening
quality of new estates
Loans to building companies
backed by government
A form of subsidy to
encourage investment
Likely to be expensive option
(short term policy)
End affordable housing
requirement for new build
estates
Builders can charge
higher average prices –
stronger profit motive
Big problem is affordability –
more luxury homes built?
Targeted government funding
of skills training
Expands the human
capital available to the
construction sector
Will take several years to
have a significant effect
Build a lot more social housing /
affordable homes
Fund councils to build
more affordable homes
More council houses might
hit average house prices

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