Comparative statics in the housing market

4. Market Equilibrium
Faith enjoys watching "property porn", in particular 'Location, Location, Location'. Over the last few years our thoughts have turned from mild humour to outright offense that they have continued to stoke the market. Remember, although packaged as policies that help people struggling to afford a mortgage, artificially low interest rates bribe the most vulnerable people into the market. People have been seduced by (a) easy credit; and (b) an expectation of continued growth in house prices. Both of these suggested an inevitable contraction, and led many people (such as myself) to continue to rent. But as bad policy intervention begets further bad policy intervention, interest rates continue to be slashed to subsidies those bad judgments, and punish the good ones. Despite the difficulties of making entrepreneurial judgment, it can be even harder to anticipate government reactions - and this is why Paul Davidson is so utterly wrong - governments can contribute to uncertainty by changing the rules of the game. They are not exogenous to the development of social institutions. (Also see here)
Still, some basic comparative statics might help us understand the market dynamics a little better. Recently Stacey and Phil spend an entire program questioning whether they contributed to the financial meltdown, openly speculating as to their personal culpibility. Their conclusion was both lame ("we never encouraged people to borrow more than they could afford") and important:

The bottom line is that Britain is a crowded island with a growing population

Use comparative statics to answer the following questions about the housing market:

1. Why does Phil's statement (in bold) suggest rising prices over the medium-long term?
2. What is the effect of credit constraints that dramatically limits banks' willingness to lend out mortgages?
3. What would be the effect of reducing planning restrictions?
4. What if there's a major recession?
5. What if interest rates continue to fall?
6. What if Britain closes its borders to foreigners?

Past posts on the housing market: April 2004, October 2004, April 2007, August 2007, May 2008

This is a fictituous case written to enable classroom discussion. It is not intended as a commentary on good or bad management practice. References to real companies are purely to add realism.