EclectEcon

On one of my walks here in Southern England, I stopped to peruse the listings in the window of a real estate agent. The very cheapest listing I could find was for £105,000, roughly the equivalent of over $210K (Cdn). It was a two-room [not two bedroom, two room] flat. Maybe that does not seem like very much to those of you who live in big cities, but your salaries tend to be commensurately higher, too. I don't think that's the case to the same extent here. Most standard (but small) homes in the area where I am living would go for maybe £300,000, with prices up in the range of £600,000 (over a million dollars) for a nice, but not too luxurious, suburban type home, at least in this area.

I started wondering (and asking about) how housing prices can be so high in this part of England. I'm an economist, and so my attention turned to supply and demand, of course.

Supply

On the supply side, zoning-type restrictions are clearly important. There are many pastures and fields that the local councils will not free up for housing development. This explanation sounds remarkably like the one that Tom Sowell makes often, when lamenting the high housing prices in the San Fancisco area. I gather prices are lower up north.

Demand

Who can afford these places? I would have said nobody, but clearly many people can afford them — otherwise the demand curve would not be out where it is. If there is a nearly vertical supply curve, the prices are mostly demand-determined, and that demand must be coming from somewhere.

Part of the demand is driven by expectations of capital gains. Everyone I asked about the housing prices said something to the effect of "You just have to get in. Once you're in, then you can start trading up." This kind of expectation, of course, can turn housing prices into a bubble phenomenon.

Part of the demand is financed by parents and grandparents. Older people sell or re-mortgage their homes and lend/give the money to their younger progeny so the young ones will be able to get in on the ground floor.

[an international tax lawyer teaching here was unable to confirm this next bit for me]: One person told me that in the UK if parents bestow gifts on their children more than seven years before the parents die, then there is no inheritance tax on the gift. I'm sure it is more complicated than that, but it made me chuckle to think of the gaming and planning involved:

• Should we give the kids thd money this year, or do you think we can hold on for another eight years instead of seven?
• Or imagine this conversation: "I don't know....Dad's barely a vegetable on a ventilator but in just four months it'll be seven years since he gave us that money, so let's keep him hooked up at least four more months. After all, the NHS will end up paying for it anyway."

If you don't think people respond to these types of incentives, recall this .