Price Elasticity of Supply of New Housing

The supply of new housing is price inelastic in the short run.

Several reasons have been put forward for the low price elasticity of supply
of housing: -

1. Construction companies cannot suddenly plan and then build thousands of
new homes in areas when there is an increase in demand.

This is because of
planning regulations and other constraints on new
developments – where local authorities may restrict the building of new
in accordance with their local housing plans. These restrictions includes
legislation to protect the green belt.

2. Large increases in house prices do not seem to lead to significant
increases in
the amount of land made available for housing developments.

3. Supply is also restricted by the limited
availability of skilled labour such
bricklayers and electricians and other factor inputs needed in the

Time delays in construction projects mean that the supply of newly
properties is limited.

The Supply of Older Housing

The supply of older properties affects the balance of demand and supply in
the housing market. The available supply depends on the number of people
putting their homes on the market when they move from an area or from
people choosing to upgrade to a more expensive house with a particular

Often the level of housing supply impacts on property valuations in a highly

localised way
. Particular areas can become hugely popular but if supply is
limited, the “pent-up demand” for properties carrying desirable postcodes
can send housing values soaring. When demand for housing increases
perhaps because of an
inflow of population into the area, or a rise in
incomes following a fall in unemployment, there is upward pressure on market
prices. As supply becomes more elastic (shown in the right hand diagram in
the figure above) assuming the conditions of demand remain unchanged, we
expect to see downward pressure on prices and a further increase in the
equilibrium quantity of houses bought and sold.