In a couple of previous posts, I have laid out the basics of supply and demand analysis, which should give us all we need to know to look at a contemporary political and economic issue – the Help-to-Buy scheme.
Let’s start with a supply* and demand diagram showing the housing market** before the scheme’s introduction:
Now let us introduce the Help-to-Buy scheme. The scheme, by lowering deposit requirements and offering loans, will allow more people to buy homes than before. The demand curve will move to the right:
We see that, although more homes will be bought, they will be bought at a higher price. The recent surge in house prices since the scheme’s introduction gives some credence to the usefulness of the above analysis.
This is a funny way to help people buy a house – make it more expensive to buy!
Let’s turn again to our supply and demand analysis to see what a better solution would look like. If the government tried to increase the supply of houses, then our supply curve would move to the right:
Now, people will be able to buy more houses, but because prices are lower, they are more affordable. People won’t have to rely on the government or the Bank of Mum and Dad to get a roof over their heads.
*Price Elasticities: Notice I’ve drawn the supply curve quite steep. This is because even though house prices increased hugely, say, in the decade up to the financial crisis, house building was historically low. While prices more than doubled in real terms, on average only around 190,000 homes a year were built in the period. This is about 4/5 the post war average, and not much more than 1/2 that built in the 50’s, 60’s and 70’s. I’ve taken data from the government’s Statistical data set: Live tables on house building, Table 241. You can see a graph showing the number of homes built each year in the post-war period, with the period 1997-2007 highlighted in another colour, by clicking here.
This relates to the price elasticity. This lets us answer the question, “If I cut prices, how much more will people buy?” (the price elasticity of demand) or “If prices go up, how much more will firms try to sell?” (the price elasticity of supply).
**OK, there is no the housing market. The market in London is very different from the market in Leicester. Indeed, the market a few roads down from me will be different from my road. This is a simplification to draw out some conclusions we can make when we put our supply-and-demand goggles on.