Determinants for Demand in Private Housing

1. Principle determinants of demand for private housing.
   1. The dominant factor is price. Providing all of the other factors remain equal, one would expect a fall in price to increase demand. This increase occurs for two reasons. Firstly, the product has become better value for money and therefore becomes a preferred area of expenditure for consumers. Secondly, it enables consumers to purchase the product in replacement of a previously purchased inferior product.
   2. Household Income. As incomes rise, so does the household purchasing power. Therefore, the consumer is better able to afford products.
   3. Comparables. In incidence where, apart from price, there is a direct comparison between two products, as prices fall on product b) so consumers may substitute it for product a) where there has been no fall in price.
   4. Taste and preference. Consumer tastes and preferences change. These may be affected by outside sources such as promotion or peer pressure. In this event, such changes will have an effect on demand.
   5. Expectations. The perception of future changes in price will affect demand. If prices are expected to rise in the future, present demand will increase, and visa-versa.

Therefore, if it is expected that private house costs will rise, but the present cost of purchase falls (i.e. mortgage payments), because consumers generally view property rental as inferior to private ownership, the demand for private housing will increase.

2. Difference between supply of new housing and manufactured goods
   1. New Housing

The Supply of new housing has limitations. The principle limitation is it’s fixed core element, the land. Although there can be changes made in the use of land, for example from agricultural, it is a limited resource that cannot be easily expanded. As a result, it is considered a fixed cost. Every individual product (house) will require a significant element of land for manufacture. The relative scarcity of the supply of land, this has the affect of increasing the cost of supply.

2. Manufactured goods

The supply of manufactured goods can be more easily increased. Once the fixed costs are in place, i.e. property, plant and machinery, these are equally divided over the number of goods produced. An increase in the number of products manufactured will therefore reduce the fixed cost element per unit. For example, fixed costs of £100 spread over 1,000 products will be one tenth of that cost if it is spread over 100 products.

3. Comparison of affordability with effective demand for a product
   1. Concept of affordability

The concept of affordability (Marshall et.al. 2000) in respect of property rental is threefold. 1) That such rental is set at a level, which does not force the tenant into a position of poverty. 2) That it does not consume more than 25% of the tenant’s affordable income and 3) that the lessee is left with sufficient funds to be able to afford other basic necessities.

2. Concept of effective demand

The concept of effective demand is based upon the premise that supply and price determines demand. Whilst taking into account the available budget of consumers, effective demand works on the basis that increase of supply reduces cost, which enables lower price and therefore fuels demand.

The motives for these concepts vary in that the affordability concept is based upon social precepts, whilst effective demand is based upon profitability and price.

4. Other Criteria

The criterion for assessing affordability is centred on five key issues.

1. There needs to be an effective analysis of the RSL’s^[1] own rental levels. Such analysis should determine rent averages by authority area, levels as calculated in relation to the type of property and the area in which the property is located.
2. Comparison of rental levels with other RSL’s.
3. Comparison of rental levels with other rental organisations. For example, those in the private sector.
4. By evaluation of the income levels and type of household, for example single parent, pensioners, families etc.
5. Formal assessment. Within this issue, RSL’s need to determine that households have sufficient income level to be able to afford the rent and still be able to achieve a certain standard of living. It is also needs to assist in reducing the reliance of tenants on other benefits by providing them the opportunity to rejoin the employment market.

Other criteria that could be used include locality of tenant to work concentration areas, which would reduce tenant expenditure and increase job opportunity.

5. Expectation of affordable housing schemes

An ideal affordable housing scheme should provide occupiers with reasonable living accommodation sufficient for the needs of the household unit, at the same time allowing a standard of living that provides for all their basic needs. For the provider who finances the scheme it should allow for a reasonable return on their investment, plus sufficient capital replacement to enable them to continue the provision of such housing.

Learning Activity 10

1. Supply differential between houses and other household product requirements

Supply of houses differs from other products such as cars, white goods and luxury goods in that it is not as easily adaptable to meet demand. A car can be readily supplied and that supply rapidly replaced. This is not the position with a house. Here the supply source takes longer to react to any movement in price, because of the motivation of the house seller. A number of factors that affect supply, such as the motivation of the occupier to sell. If they are satisfied with their accommodation and the location, they are less likely to sell, limiting supply. Similarly, if they perceive prices will continue to rise, they will delay selling, a reverse effect will happen when house prices are depressed.

2. Houses completed

The chart above generally shows that the increase in house prices has not been met by a significant rise in the level of new builds, in fact, House builds supply has remained at a similar level throughout the ten years from 1995.

If one wanted to construct a genuine graph for new house other data would be required, including variety of construct, for example flats, houses etc, and take into account the population demographics.

Learning Activity 12

1. Scarcity

Scarcity occurs within the social housing market where there is a lack of availability of the core element of house building, namely the land, and where house occupiers do not put their houses up for sale.

2. Opportunity cost

Many landlords have seized the opportunity of increasing their housing stock during the periods of deflation or housing slumps. In such cases, there is a need to weigh this cost against future gains.

3. The conditions of demand

In the housing market if the price is right and compares favourably with other housing options, such as renting, and that price is within the budget of the householder, then they will purchase a property. This is generally the preferred route of households.

4. The conditions of supply

To conditions that determine supply is the availability of products, in this case houses, at the right price. Supply will also be affected by the future expectations of the market in terms of price.

5. Perverse demand behaviour

In the housing market the major action that perversely affects demand is the substitution behaviour. Consumers generally perceive house ownership being preferable to renting and will therefore seek to move to this status as soon as is possible.

6. External effects

Several external situations affect the housing market. These include the inability of young people to get onto the property market; changes in employment conditions and types of households. Similarly, issues such as planning and taxes will affect the market supply and demand.

7. Sources of inefficiency

Inefficiencies within the housing market, particularly with social housing, where results of data analysis do not take into account all of the relevant factors and the resources are not being used to create the maximum economic welfare..

8. Sources of inequity issues

Inequity can arise in the housing market because of the house-building programme failing to keep pace with the rate of demand.

9. Monopoly power

Monopoly power exists where there is no alternative to the product cost or the method of acquisition. It gives a monopoly the ability to affect the price of their product without reference to market trends.

Nostradamus Housing Association

Nostradamus is a social housing organisation. They are faced with a situation of reduced occupancy as a result of mortgage rates being reduced to a level where repayment are at a significantly lower level than the association charges. The occupancy issue is exacerbated by the fact that the council has transferred its housing stock to another association. Current research shows that the trend in the move to ownership is likely to continue for the near future. Therefore Nostradamus have decided to sell off their surplus stock, under a right to buy scheme, in order to rectify it’s worsening financial position.

Within the case study presented, we see that the association is operating a system of allocative efficiency, in that the sale of their houses benefits them by reducing their financial difficulties, thereby making the business more efficient. It is equitable to both parties, as the association benefits by reducing its financial difficulties and the occupier benefits by acquiring a property at a cost, which is less than they were previously paying.

It is found that owner-occupied housing is also provides equity, as it assists with the distribution of wealth between individuals who were previously disadvantaged. Thus, the association is also fulfilling its role in economic welfare.

The sale of redundant houses by the association does give rise to a number of criticisms in addition to the fact that these were transferred from the local council. One of the most important criticisms is that it leaves the association with a much lower stock of houses, thereby it would be ill prepared to be able to provide housing for those who need social housing, should the local economy suffer a future reverse of fortunes in the future. A further criticism is that such houses could have been utilised to reduce the difficulties being experienced in other areas of the country. With areas such as the South East suffering shortage of low-cost housing for rent or sale, there could have been some relocation effected to have reduced this difficulty. This would have also have had the effect of assisting those in need in those areas by providing them with the opportunity of possible work as well. Furthermore, by selling the houses below the original cost, the association can be said to have misused council funds. These funds essentially would have been provided by the members of the local community, through the payment of local taxes.

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As a result of all of these issues, a criticism could be levelled at the association that it failed in its duty of social care and welfare by not undertaking a study of other possible ways in which it could have utilised the excess housing stock and, at the same time, addressed its financial issues.

The social imbalance could have been addressed in other ways. Primarily, it could have been offered to the government at an equitable rate, for use in helping them to address local and national homeless problems. This would have satisfied the issue of welfare. Secondly, the association should have looked at the possibility of reducing the rate of its rent to that which would be comparable with current mortgage payments. This would have led to higher levels of occupancy and increased the income of the association, thus reducing over time the level of its cash flow difficulties.

The third way of reducing the social imbalance would have been by helping to address the issues that first time buyers suffer, namely not being able to gain entry into the property market. In line with other organisations, the association should have looked at the possibility of a “Rent and Buy” scheme. Under this scheme, the buyer purchases part of the property equity and the association purchases the balance, for example, the buyer may buy forty percent and the association sixty. Over the years, and as the buyer’s income levels rise, under this scheme the buyer would be able to then purchase the remainder of the property equity, on an instalment basis, from the association. These future equity purchases would have been at current market rates. This would have had the additional benefit of enabling such people to be able to remain within the location of their choice, close to families and their work environment.

References

Marshall, D., Grant, F.L., Freeman, A. and Whitehead, C (2000). Cambridge Housing and Planning Research. Retrieved 12 October 2006 from http://www.dataspring.org.uk/Downloads/Discussion Paper 2.pdf

Live Tables on Housebuilding (2006). Department for Communities and Local Government, Retrieved 11 October 2006 from http://www.communities.gov.uk/index.asp?id=1156032

Demand and Supply for housing (2006). Tutors2u. Retrieved 12 October from http://www.tutor2u.net/economics/content/topics/housing/housing_demand_supply.htm

Research Project. The UK Housing Market. biz/ed. Retrieved 12 October 2006 from http://www.bized.ac.uk/current/research/2004_05/090505.htm

Footnotes

^[1] Registered Social Landlords