Thursday, May 1, 2008

The only solution to the housing crisis – falling prices

The only solution to the housing crisis – falling prices

Now that house prices are falling, the old supply and demand argument looks a lot weaker. And this also means affordability for key workers and first-time buyers will eventually stop being an issue.

Posted by damien @ 12:28 PM (588 views)
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2 thoughts on “The only solution to the housing crisis – falling prices

  • dohousescrashinthewoods says:

    Looks like Brown’s 3 million hutches to be built all over anything with any intrinsic natural aesthetic value will indeed be shelved.
    I can’t see any of the house builders signing up to his scheme.

    Reply
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  • I think the house price will crash BECAUSE of supply and demand. Microeconomic theory shows that a steep supply curve (inelasticity as it is hard to build houses to meet demad quickly) means that SHIFTS in the demand function (due to availability of credit, feel-good etc etc) mean that for every given point of supply, the price willing to be paid is higher. Since that supply curve is very inelastic the price shoots up. Now add in that banks are even more willing to increase peoples ability to pay, then that whole demand curve shifts to the right again.

    On the flipside – when the demand function shifts back (because at every point along it people are less “willing and able” to purchase due to fundamentals, then the price intersection falls just as quickly. Since banks falls reinforce less confidence still, the demand curve SHIFTS again – cause further steep falls.

    Not worked out how to post an illustration on here – so if anyone can illustrate this for me – it’s pretty obvious that prices WILL fall quickly. The bigger they are, the harder they fall.

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