The Law of Demand for Housing

Yesterday, I wrote this piece on the demand for housing

  • Basically we noted the phenomena that rising house prices often cause an increase in demand and falling house prices cause lower demand. This seems to contradict the basic law of demand. But, I suggested this was due to shifts in the demand curve.
  • However, yesterday afternoon I was on a long bike ride (50 miles in under 3 hours) With little to do about from curse the slippery mud on the winter roads, my mind went back to the question and I thought of a different perspective.
  • Suppose, you are looking for a place to invest your money. You think one of the best ways to judge an investment is to do what everyone else is doing (this investment strategy has its obvious flaws, but, many people do seem to follow it).
  • Therefore, if shares, bonds and gold are doing badly you will avoid them. However, if house prices are rising then they are perceived to make a good investment. Therefore the rise in house prices encourages investors (or speculators) to buy. A good which is rising in price therefore attracts more demand because people think it will give capital gains. So in that sense you could say it is not so much that the demand curve is shifting but, that it slopes the wrong way.
  • An individual house will still be subject to a usual demand curve. But, housing in general will not.

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