It is often said that the British have a national obsession with housing. If this has ever been true, it certainly is now: the rapid growth in house prices and concerns about a potential house price ‘bubble’ have been at the forefront of political and economic debates over the past year. This article explores how economic theory can help us make sense of this debate.
What determines the price of housing? Economists typically think about this question using the supply and demand framework. At the most basic level, economic theory predicts that the ‘equilibrium’ price of housing in a competitive market will just be the price at which the quantity of housing which people demand equals the quantity supplied. All else being equal, an increase in demand will raise the price of housing, while an increase in supply will see prices fall.
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