Demand and supply elasticity are extremely important to determine equilibrium and corresponding prices in the housing market therefore this section will discuss these aspects of the problem.
The movements towards equilibrium are very slow in case of housing market and it is due to the existence of inelastic demand and inelastic supply of housing facilities. If the law of demand hold then the increased demand for housing is accompanied with high prices of it and in turn increased prices will tend to increase the supply of housing with a view to enjoy more profits by the suppliers. Practically the situation is much different from that of theory because there are many barriers that do not allow the market to increase the supply and law of demand and law of supply are based on the assumption that there are no barriers in the market (Oxley, 2004).The resources that are needed for house building are also quite scarce so it becomes very difficult to increase the supply to adjust to the changes in demand. The models that were presented by classical and neo-classical were also based on the assumption that there is no short-run and long-run market adjustment processes.
No consensus has been developed regarding empirical estimates of elasticity of supply and demand. Ambiguous estimates are provided by the empirical research and the main reason is difficulty in the modelling. Major contribution in this field is made by Monk (1999) whose estimates indicate that elasticity of housing demand is about 0.2 to 1 in United Kingdom. Similarly income elasticity of demand remains in the range of 0.5 to 2.0. As far as the supply side is concerned it is estimated to be in the range of 0.15 to 1.8 Bramley (1993a). Swank et al (2002) compares the price elasticity across countries and conclude that housing market of United Kingdom is much more inelastic as compared to other country’s markets. The evidence of Netherlands, France and United States can be taken that have the elasticity to be 0.45, 1.1 and 1.4 respectively. Moreover, it is difficult for equilibrium to be restored in the housing markets of United Kingdom as compared to other counties (Meen, 2005).