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Supply and demand in the housing market

Thursday, March 30, 2017 3:58
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(Before It's News)

From City AM:

Developers have put the brakes on house building in central London as house prices in the capital dropped at the end of last year.

In the fourth quarter of 2016, construction started on 1,270 housing units in the centre of the city, a drop of 75 per cent as compared to the same quarter the year before, according to a report from JLL.

And home sales fell 24 per cent in the final quarter of 2016, with just 1,880 transactions taking place. Prices in London have fallen 5.7 per cent year-on-year.

Hooray for free markets and allowing supply and demand to allocate resources most efficiently, but this is no such thing, is it? In a truly free market, super-profits would be competed away – what the oligopolistic land bankers are doing is carefully drip feeding bits of land onto the market so as not to allow prices to fall and thereby maintain their super-profits (as easily measured by the value of land).

And it must be clear to all but the most rabid Faux Libertarian that some areas will always be more desirable than others, for whatever reason, so while land prices at the very margin (low wage, high unemployment areas without nice scenery) are pretty close to zero, anything above that represents a monopoly/rationing position.
My other thought for the day is that the idea that “building more homes will cause prices to fall – it's supply and demand, innit?” is clearly nonsense if you remember that rents (and hence prices) are largely dictated by local average earnings (putting holiday areas aside). Wages go up, rents and prices go up and vice versa, it is that simple.

Would building more homes in high price areas (London, commutable parts of south east, M4 corridor, nicer parts of any large town or city) cause wages to fall?

No of course not. Why would it? Wages are higher in those areas largely because of agglomeration effects*, so more homes = more people = more agglomeration effects and the two effects (more supply and more demand) will always more or less cancel out. Rents and prices will only fall in areas which younger/more ambitious people are abandoning.

* All those people making a handsome living in London in financial and legal services would struggle to earn a fraction of that anywhere else in the country. They can only earn that because they are in London. This applies to me in spades.


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