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Real Estate
Supply of housing
Housing
supply can be produced using land, labor, and various other inputs like
electricity and materials used for building. The quantity of new supply is
determined by taking into consideration the cost of these inputs, the
price of the existing stock of houses, and the technology of production.
The price elasticity of supply in the long run tends to be quite high.
However, in the short run supply tends to be very price inelastic. The
supply price elasticity depends primarily on the elasticity of
substitution and supply restrictions.
There is a significant amount of
substitutability both between labor and materials, and also between land
and materials. In high value locations, multi-story concrete buildings are
usually built to reduce the amount of expensive land used. As labor costs
began to increase since the mid twentieth century, new materials and
capital intensive techniques were employed to reduce the amount of
expensive labor used. However, supply restrictions can substantially
affect substitutability. In particular, the short supply of skilled labor
(and labor union requirements), can cause restriction of the substitution
from capital to labor.
Land availability can also be a constraint
when it comes to substitutability, if the area of interest is delineated
(that is, the larger the area, the more would be the suppliers of land,
and the more substitution that would thereafter be possible). Land use
controls that are commonly employed like zoning by-laws can also reduce
land substitutability drastically.
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