In Economic Analysis for Property and Business, 2000, Marcus Warren describes three categories of elasticity.
Price elasticity (demand and supply) – is ′perhaps the most useful and common elasticity measure in property market analysis′. This form of elasticity measures the responsiveness of the quantity demanded or supplied in a market, due to a change in the actual price of the good or service.
Income elasticity of demand – is simply a measure of the responsiveness of quantity demanded due to change in income
Cross price elasticity of demand – measure the effect of a change in the quantity demanded of one good or service
The three categories are fundamental in explaining the effect one variable such as price can have an effect on the other and the theory can be applied to products and services including housing. The aforementioned theories and literature are to give the reader an understanding of the basic economic principles involved however a more focused approach in terms of the supply and demand in the real estate market will now be identified.
′The ability to rent or buy creates two separate, though not independent, markets within housing′ (Charles, 1977). In the rental market demand arises from households, who choose to purchase their housing by renting houses, supply can be through both public and private sectors. In the purchase market demand arises from those who wish to purchase their housing services by buying the asset (owner occupation) and landlords who wish to buy the asset to enter the rented market. Supply is sourced in two forms in new accommodation and the supply of second hand dwellings (Charles 1977).
Research investigating the impact of public policies on land and property markets undertaken in the neo-classical tradition is therefore focused on how policy directly affects supply and demand outcomes.
Determinants of Supply and Demand
Demographic Factors such as the rate of household formation which increases demand with the increase in rate of household formation. The number as well as the composition of households is strongly related to changes in demography. In and outmigration to and from the geographical area of the housing market can influence supply and demand (Bysveen and Knutsen (1987). These movements affect the change in population number and the household composition.
