Adjustment With Depreciation
The diagram to the right shows the effects of depreciation. If the supply of existing housing deteriorates due to wear, then the stock of housing supply depreciates. Because of this, the supply of housing (SHo) will shift to the left (to SH1) resulting in a new equilibrium demand of R1 (since the amount of homes decreased, but demand still exists). The increase of demand from Ro to R1 will shift the value function up (from Vo to V1). As a result, more houses can be produced profitably and housing starts will increase (from HSo to HS1). Then the supply of housing will shift back to its initial position (SH1 to SHo).
Read more about this topic: Real Estate Economics
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