Understanding Supply and Demand in Housing: Lessons from Bitcoin and the Diamond Industry

Supply and demand are the twin pillars of economics that determine market behavior. They explain how prices are set and how resources are distributed. This is especially true in today's housing market, where many people are struggling to find affordable homes amidst a significant housing crisis. In this post, we will dive into how supply and demand affect housing. This "complex" problem is not actually that complex. It is a simple problem on a large scale.

What is Supply and Demand?

At its core, supply and demand refer to the relationship between the amount of a product available for sale (supply) and the desire of consumers to buy that product (demand). When demand exceeds supply, prices usually go up. When supply exceeds demand, prices tend to drop.

In a healthy market, the price of a product stabilizes at a point of balance, where the quantity supplied equals the quantity demanded. This equilibrium is crucial for understanding how the housing market operates.

The Housing Crisis: A Supply and Demand Perspective

A housing crisis can largely be traced back to an imbalance between supply and demand. In many cities, housing demand has surged due to population growth, favorable interest rates, and a growing desire for homeownership. For example, in Sydney, Australia, home prices increased by 24% from 2020 to 2021, while the number of available homes dropped significantly, leading to fierce competition among buyers.

Key factors contributing to this supply shortage include:

• Zoning laws: These regulations can restrict the types and amounts of housing that can be built in certain areas. For instance, strict zoning laws in Melbourne have limited new housing developments, contributing to the scarcity of affordable homes.

  
  

• High construction costs: The cost of materials and labor continues to rise, making new construction projects less viable. In Australia, the prices of materials like timber and steel have surged, impacting the overall affordability of new homes.

  
  

• Labor shortages: The construction industry is facing a deficit of skilled workers. A report by Master Builders Australia highlighted that many builders are struggling to find qualified labour, which delays projects and exacerbates the housing shortage.

As a result, many potential homebuyers in Australia find themselves unable to afford homes, further complicating the housing crisis. When you decrease supply and you increase demand home prices sky rocket.

Bitcoin: A Case Study in Supply and Demand

Bitcoin serves as a fascinating case for understanding supply and demand. With a maximum supply capped at 21 million coins, Bitcoin's scarcity drives up demand. As more people become interested in cryptocurrency, the demand for Bitcoin has surged, leading to rapid price fluctuations. Bitcoin reached $180,000 AUD this month (August 2025).

This scarcity mirrors the limited supply of homes in high-demand areas. Bitcoin has manufactured a synthetic supply and demand chain. I'm just going to come out and say it; Australian policy is doing the same thing, and young australians are getting left in the dust because of it.

The Diamond Industry: Manipulating Supply and Demand

The diamond industry offers another insight into supply and demand management. Companies like De Beers have historically controlled diamond supply to maintain higher prices. By holding back a significant number of diamonds from the market, they create a perceived scarcity that drives demand.

In the housing market, similar strategies can occur. Developers might delay new housing releases to keep prices high. Local governments can also impose restrictions that limit new construction, which can worsen the housing crisis. For example, studies show that cities with stricter building regulations can see housing prices rise by up to 15%. It doesn't always make the city more appealing though. For example, the prices have gone too high in the outskirts of brisbane that people can't afford paint jobs on their homes and shop front's. When laws started to hinder the supply and demand balance of housing, we should have made amendments quicker. But enough complaining. What are we going to do about it now?

We Can Increase Home Supply

1. Streamline new home build approvals, and reduce red-tape and bureaucratic nonsense that makes building new homes expensive and slow. We should be able to build homes from A-B in six months not two years. Every other country can, why can't we?

2. Increase funding for training new construction workers. We do this already, but Australia has done better in the past. As a community we should begin training youth as young as twelve, when they hit highschool how to construct things. Teach them how to help Australia.

3. Create incentives for local governments and business to develop affordable properties quicker.

4. Government run property development programs to help keep private companies competitive and fairly priced.

How Can We Lower Demand

1. Increase the incentive to sell Investment properties to first home owners.

2. Lower the benefits of buying and keeping investment properties through taxes.

3. Encourage single people to stay with family, friends, or rent spare bedrooms.

4. If you have a spare bedroom or granny flat, consider renting it out to a tenant.

Final Thoughts

Grasping the concepts of supply and demand helps us navigate the housing market problem in a simpler way. Increasing home supply alongside reducing demand will lead to more affordable housing. By simply addressing both sides of this equation, we can work towards a fairer and more accessible housing market for everyone.

(Melbourne, Victoria, Australia)