ChainWhat it assumes · how to break it
Start
UK house prices fall, as in 2008, reducing the profitability of building new homes.
1
As a result, new homes become less profitable to build, because the selling price falls closer to land and building costs.
profit · residential investment
profit · residential investment
Assumes: Building costs do not fall as much as house prices.
But: Land prices and material costs may also fall, protecting margins on new builds.
2
This means housebuilders delay or cancel new developments, so residential investment falls.
investment
investment
Assumes: Builders respond quickly to lower prices.
But: Builders with sites already started usually finish them, so the fall in activity comes with a lag.
3
Consequently, the derived demand for construction workers falls, along with demand for estate agents, surveyors, solicitors and furniture and DIY retailers who depend on housing transactions.
derived demand for labour
derived demand for labour
Assumes: Construction is labour intensive and demand for these workers moves with the housing market.
But: Many construction workers are self-employed and may move to repair, maintenance or infrastructure work, so measured unemployment rises less.
4
Therefore, jobs in construction and related sectors are cut, and unemployment rises, especially in areas where housebuilding is a large employer.
cyclical (demand-deficient) unemployment
cyclical (demand-deficient) unemployment
Best link to attack
Assumes: The government does not step in to support building.
Assumes: The government does not step in to support building.
But: Government schemes to support buyers, such as Help to Buy from 2013, or a social housebuilding programme can sustain demand for construction workers.
End
Employment falls in construction and housing-related sectors, raising unemployment.
Evaluation chain
- E1However, the fall in construction employment depends on the government not replacing private demand for building.
- E2When the government funds social housing or subsidises buyers, then housebuilders keep building because demand for new homes is supported.
- E3As a result, the derived demand for construction workers falls less, although the cost falls on the public finances.
- E4So the effect on employment depends on government policy, and could be small if building is supported, especially where there is a long-run shortage of homes.
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Questions this answers
- Assess the impact of a fall in house prices on employment in the construction industry.
- Explain how a fall in house prices can lead to a fall in investment.
- Discuss whether the government should support the housing market when house prices fall.
Diagram
Labour market diagram for construction: labour demand shifts left (derived demand), employment and wages fall. An AD/AS diagram with AD falling as investment falls can support it.
Reverse and related
Rise in house prices → building becomes more profitable, residential investment rises and construction employment grows.