Animated by Akif Talat. Created with Adobe Illustrator and Premiere Pro
Have you ever heard of downward filtering in the housing market? It is an interesting concept in real estate economics. Whenever individuals or families decide to purchase a newer home, older housing is now available for lower-income buyers. The older homes become more affordable, and the stock of housing filters down. There is always demand for housing and there is demand for older homes. As people buy new, higher-quality homes, their old homes fulfill the market demand for cheaper, lower-quality housing. It is important to remember that there is a direct relationship between income changes and the demand for how much house an individual needs.
In a free market, filtering may be the most efficient way to fulfill the demand for cheaper housing. However, the reality is that there is not enough new affordable housing built for lower-income households. Most of the “affordable” housing is created by the filtering process.
Will it be more beneficial to build properties that are of lesser quality? Should policymakers subsidize the construction of property that is not high quality? Thereby potentially increasing the supply of older homes through filtering.
Positive filtering is also probable. Property that is low-quality is now being purchased by people with higher incomes. This occurs when house prices are increasing too fast for low-income earners. Not enough supply for properties to filter down. Lack of supply means people will stay in their current homes for longer, slowing down the filtering process. The homeowner can decide to stay and renovate their home instead of purchasing a new home. The biggest concern is on the supply side, regulations and restrictions will affect downward filtering. At the end of the day, it is all about supply and demand.