Modelling the Supply Side of the Housing Market

During the 1990s in many countries across Europe, government interference with housing supply was reduced in favour of a more market-orientated approach; i.e. private housing market agents (e.g. project developers) got the lead under the direction of local municipalities. In short, this didnít fulfilled anticipation: although housing demand remains very high, housing supply dropped to after-war lows. These contrary results indicate that our knowledge on the behaviour of different agents and dynamics of the relation between them is limited. In this paper we present the results of a model we developed in order to explain contemporary development on the Dutch housing market. In essence, the model is a disequilibrium two-sector model with supply, demand and house prices as endogenous variables. In the model, house prices are serving as the long term equilibrating force (although, house prices are assumed to be downward rigid on the short term). In the model housing supply in the owner-occupied sector is profit-driven; while housing supply in the rental sector is determined by (local) government. Finally, on the demand side, demographic, economic growth and mortgage costs (interest rates) play the decisive role. We estimated the model by using iterative three-stage-least-square procedure. The results show that both housing supply and house prices could be explained reasonably well. In turned out that housing supply during the 1990s was limited mainly because rising land prices offset the increasing in the house prices during that period; hampering (expected) profit and hence downsizing the number of newly build houses.