One small step for demand, one giant leap for housing prices?

By Shahar Rotberg*

This is a very short post, in which I wanted to discuss some concepts that I think are important to remember. I have only 2 points to make:

1. I think people tend to think that if demand rises by 1%, then housing prices should also rise by roughly 1%. So there is a conception that a small shift in demand should not impact housing prices much. But if you look at the graph below, which I created for illustration purposes only, you will see that a 1% shift in demand (on the horizontal axis) causes housing prices to rise from 0.5 to 0.8 (which is a 60% increase). This is because supply is inelastic and so is demand. So, “one small step for man, one giant leap for mankind”, where you should replace man with demand and mankind with housing prices.

2. Sometimes I hear people say that between year X and year Y the supply of housing increased by Z units, and that the number of new households was also Z, so clearly there is no supply problem because it exactly met the demand. The issue with this reasoning is that when people cite numbers from the data, they always get the EQUILIBRIUM numbers (where the supply CURVE intersects the demand CURVE), and those by default equal each other. You can go back to my graph, and say that the QUANTITY supplied was equal to the QUANTITY demanded, so there is no supply “issue”. But as you could see clearly in the graph, supply does not respond to the price at all — and yet the market clears!

*Disclaimer: This post was written by Shahar Rotberg on his own time and capacity, and the views expressed herein do not represent the views and opinions of the Canada Mortgage and Housing Corporation.