Toward a Better Understanding of Supply and Demand

"Can new build supply be the panacea that many appear to hope?" is the question posed by Neal Hudson in a recent column for the U.K. website Pieria.

To those that would reply unequivocally "yes" to that question, Hudson argues that focusing only on supply relies "on an overly simplistic model of the market."

More specifically Hudson counters policies that track the creation of supply with the rate of projected household formation. Such policies, argues Hudson, do not account for the complexity of the market—neither does projected household formation indicate of demand:

"New build completions are only ~10% of all transactions and so the second hand market is the majority of available housing supply at any given time. More importantly, household projections are not an indicator of housing demand. They are, at best, an indicator of housing need but even then they are flawed."

After describing the factors that determine housing demand (including the factor he believes has the most influence: the cost and availability of credit), Hudson explores potential alternatives for converting housing prices into a target for housing need. Hudson identifies several academic models as promising in that effort, but that also reach a challenging (or troubling) conclusion: "If the academic models are correct then it would appear we need to build substantially more homes than household projections, current ambitions, and housebuilding capacity suggest is possible." Instead of focusing only on supply, Hudson suggests policy makers "also tackle credit supply, taxation, investment incentives and many of the other contributing factors to current high house prices."