Housing prices, marginal cost and an increasing income gap

The following post was written as a comment for the Huffington Post Canadian website for an article claiming that a widening income gap is forcing up housing costs for everyone.

http://www.huffingtonpost.ca/2011/11/21/canada-income-inequality-house-prices_n_1101655.html?ref=canada

Here’s an alternate explanation for high house prices.

Prices are determined by supply, demand and the marginal cost of producing the last item.  This means that in any segment of the housing market the price for all houses will be equal to the cost of manufacturing the last one built.  If  supply and demand brings the price below this figure no more houses will be built and if supply and demand takes the price higher more houses will be built until an equilibrium is reached.

In Canada the cost of building houses has clearly been increasing.  Marginal cost explains why many people have made large sums by selling their older homes.

The income gap explains why rich people can continue to buy expensive houses while those people whose income is shrinking can’t.

For people at lower-income levels to be able to resume buying homes one of three things would need to happen.  Their incomes in real terms could increase,  new building techniques or new cheaper sources of materials could be discovered so that houses could be built for less money or the lack of demand could result in a reduction in prices below marginal cost.

(The author of this comment has a web log on economics at https://economics102.wordpress.com/)

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