The objective is to simulate the behaviour of the housing market. This involves modelling how the demand and supply conditions for housing change and the consequences on both the price and quantity.

The simulation allows you to manipulate both demand and supply side determinants, as well as the elasticity conditions.

House prices have been on the rise over time. Interestingly, this rise has not been continual.

The pattern appears to have been a general rise over the period. However, there has been a high degree of price fluctuation. For instance, the house price index fell from the end of 1989 and did not recover to a comparable level until mid 1998.

Source: Nationwide Building Society

To understand why the price has fluctuated we need to understand what determines the price of a good. The price of a house is determined by the interaction of the demand and supply conditions within the housing market.

The demand for housing is determined by

• price of housing
• income
• price of substitutes (i.e., rented accommodation)
• price of complements (i.e., mortgages)
• tastes / utility

The factors that determine the supply of housing include

• the profit in building houses compared to other activities
• other uses of the land
• how easy it is to build houses

It can be assumed that the housing stock will be relatively static in the short run. Therefore, given these short run conditions, the rise in price can be associated with changes in domestic demand. For instance, the increase in the demand for housing will result in a rightward shift in the demand curve (D1 to D2). As a consequence, the price of housing will increase from P1 to P2. This is illustrated in the diagram.

For the most current information on house prices, visit, the Nationwide Building Society.

You can download an Excel version of the original spreadsheet (Excel 97, 19K)

The model settings for the inputs are;

• Household Income (£): 15000 to 25000
• Interest Rates (%): 2 to 10
• Population (millions): 55 to 60
• Rental Prices (£): 600 to 800
• Cost of Land (£ per hectare): 3500 to 4500
• Government Building Regulations: loose, neutral, tight
• Economic Output of other sectors: increases, neutral, decreases
• Income elasticity of demand: 0.6 to 2.4
• Sensitivity to interest rates: 90 to 190
• Cross Price Elasticity with Rental: 0.6 to 1.6
• Sensitivity to cost of land (%): 20 to 140
• Price elasticity of demand: 0.2 to 1.6
• Price elasticity of supply: 0.2 to 1.6

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