Supply-side factors in the UK Housing Market

Supply-side factors are important in setting house price levels at a local and national

There is a shortage of good quality housing in the UK which affects the affordability of the
market for people on different incomes.

Improving the supply of housing without damaging the environment is one of the most
important policy issues that need to be addressed both now and in the future.

The Need for More Housing Supply
Increases in UK house prices are due in part to supply shortages in the market
according to the House Builders' Federation (HBF) which revealed that new home building
is failing to keep pace with demand. A spokesman for the HBF said: "The country needs
200,000 new homes annually to keep pace with the growth in households. With only
160,000 being built, we have a serious problem."
Adapted from the House Builders’ Federation web site, February 2002

New home building
The majority of new homes are built by private sector construction businesses and a
growing number are being supplied by registered social landlords such as housing
The quarterly rate of new housing starts is 50,000 - 60,000 adding up an annual figure
close to 200,000 new homes. But there are doubts about whether the UK is producing
enough new properties to meet rising demand. The issue is really one about the price
elasticity of supply of housing.

Low elasticity of supply and higher prices

When the price elasticity of supply of new homes is low, the quantity of housing available
for purchase is not responsive to short term changes in price.
So for example a 15 per cent rise in price may lead to only a 3% increase in new housing
supply in the first year. Elasticity of supply in this case is +0.2 (a low figure).

This low supply elasticity suggests that rising demand can quickly feed through into
higher prices in the market.