Elasticity and the UK Housing Market.

Elasticity measures the responsiveness of demand and supply to changes in price and incomes.

Price Elasticity of Demand.

PED measures the % change in demand in response to a % change in price. In the housing market, demand for housing is often inelastic. This is because there are few substitutes to buying a house; home buyers see buying a house as a necessity. Therefore as prices rise people are willing to spend a higher % of their income on the house. This has been helped by greater generosity from mortgage lenders: it is now easier to get a bigger mortgage multiple than before. E.g. in the past 15 years, UK house prices have risen by nearly 200%, but demand has continued to grow. This suggests demand for housing is very inelastic.

However for some people on low income their demand may be more elastic; this is because as house prices rise they can no longer afford to buy.

Income Elasticity of Demand.

YED measures the % change in demand in response to a % change in income. In the UK rising incomes have led to a bigger % of income spent on housing. This suggests demand is income elastic for housing. Demand is elastic because as income rises, people place great emphasis on buying a bigger and more attractive house. For example people are willing to spend alot on a new house near a good state school; this is because buying a house in the right location can save the necessity of sending a child to a private school. Some people even buy a second house when there income increases. In the past 15 years the ratio of house prices to incomes has increased significantly.

Prices Elasticity of Supply

PES measures the % changes in supply in response to a % in price. In the short term supply is very inelastic; this is because it takes along time to get planning permission and build a house. In the long term the elasticity of supply depends on geographical location. For example, in London it is very difficult to find space to build more houses, therefore supply is very inelastic. In other parts of the country it is easier to get planning permission and find space to build new houses.