Housing – population, asset values - a model
- rpwills
- Jun 2
- 3 min read
Understanding the context around housing and housing issues operates is essential. Contrary to the simplistic assertions made by the supply and demand lobbyists and associated academics there are a number of factors which impact on housing, its availability, price and location.
We can create a model to explain how the housing market works or not! The first element is that of population change, in particular the formation of new households. In a steady state population new household formation equals household loss with the result that the need for more housing is effectively zero.
But there are other factors, which change the dynamics of the system.
Population
The first of these is population change – an increase in population results in a greater need for housing to accommodate the additional households. Population increase may arise due to migration from other countries or internally in a state from one region to another. It can also be due to natural population changes – more births than deaths.
In Cornwall natural population changes are negative with population increase arising due to more people moving to Cornwall than moving out.
Income
A second factor is disparities in household income. In the original scenario it was assumed that differences in income were insubstantial. In reality that is an unlikely situation. Disparities in income affect what people can afford to buy or rent. Another effect is that some households will be able to purchase extra dwellings either to use as a second home, derive an income by using the property as a holiday let or renting it out for residents who cannot afford to buy but need somewhere to live.
Some households may also inherit property which they can then sell – adding to their disposable income or use as a second home, a holiday let or renting it out for resident.
Both of these elements increase disparities in access to housing.
Asset values
The next crucial factor is the role of dwelling as an asset. For most people a dwelling provides a service – somewhere to live. Many of those people often think that the value of their property is an indication of wealth. However, unless remortgaged to fund other property purchases, it is effectively 'dead' money. If you sell to buy to purchase another dwelling to live in you are exchanging one for another and in most cases you are not releasing funds to use as income.
But the role of asset values is very important. The return on housing is that derived from rents. If the value of rents equals 3% of the dwellings value then that is the return. What is crucial here is that we have to look at the interest derived from other sources – bank deposits, share ownership, government bonds.
When the rate of return from these assets is lower than that for dwellings then there is an incentive for people with the resources to purchase an additional dwelling. They may do so to rent the property out either for long-term or short lets for those on holiday. Low interest rates therefore have the negative effect of making asset values including dwellings increase in value. Much of the increase in house prices arises due to this increase in asset values with earnings making up the rest of the increase.
It is also likely that as people see increased house values as a good thing, they are prepared to bid up prices when buying on the basis that future values will be higher and therefore they will feel (mistakenly) better off.
Conclusion
Changes in population and household numbers contribute to a need for housing but the increase in house values reflects the role of housing as an asset and higher earnings. Different groups within society have varying access to assets and earnings resulting in disparities in the ability to purchase or rent.
References
Comments