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This paper explores the properties of dynamic aggregate housing models. In conventional models, in response to demand shocks the primary adjustment mechanism is through prices and changes in housing supply. However, the size of the supply response depends on the price elasticity of supply and in countries such as the UK where the elasticity is low, house prices can rise sharply, worsening affordability. But this ignores the roles of housing risk and credit markets which affect the user cost of capital and the paper demonstrates that models that explicitly introduce a housing risk premium have an additional price stabiliser. The importance is shown through stochastic simulations; these simulations also demonstrate that conventional models used for forecasting and policy analysis may overstate future house price growth. [ABSTRACT FROM AUTHOR]

As a result of the recommendations of the Barker Review of Housing Supply in 2004, the Department of Communities and Local Government in England commissioned the construction of an econometric model of regional housing markets in order to examine the effects of different levels of housing construction on long-run affordability. The model has been regularly used as part of the policy-making process in England. The paper describes the structure of the model, which includes sectors covering house prices, household formation, tenure, migration flows, demographics and labour markets. Furthermore, through simulation analysis, the paper examines some of the key policy questions that have occurred in UK housing in recent years. [ABSTRACT FROM AUTHOR]

The Barker Review of Housing Supply was set up in order to address some of the weaknesses that might arise if the UK were to join EMU. The Final Report has quickly become one of the most important documents in housing policy for many years. Broadly, the Review examined the reasons for the weakness of English housing supply. For example, during the 1990s, despite the boom in house prices, private housing construction hardly grew at all. The weakness of supply is one reason why house prices in the UK have risen much faster than the European average. In response to the Review's conclusion that the land-use planning system is the main cause of supply shortages, England will be introducing affordability targets. Regional planning authorities will be required to release more land if they expect targets not to be met. Economic analysis and models will become central to the assessment. The Barker Review provides a good example of how economic analysis can be used to inform the policy debate. This paper looks at the economics underlying the Barker Review, concentrating on an analysis of supply elasticities and the required increases in construction to meet price targets. The latter has been particularly controversial since, under some assumptions, the analysis implies that housing construction in England needs to be approximately doubled in order to bring house price inflation down to European levels. [ABSTRACT FROM AUTHOR]