Xed for Second Homes

Cross elasticity of demand measures the responsiveness of quantity demanded of one good to a change in the price of another good. It is calculated using the formula XED = Percentage Change in Quantity Demanded divided by the percentage change in price.

Second homes abroad are often seen as substitute goods for second homes in the UK. This means the value for XED will be positive. The value of the XED value will depend upon the closeness of the substitutes. The theory suggests that if the price of one good (say second homes abroad) increases, it is likely to cause demand for the substitute (say second homes in the UK) to increase.

This means there is likely to be a relationship between the price and demand in each market. The extent to which this argument is valid depends upon the closeness of the substitutes. Some may argue the goods are close substitutes, if for example people are buying the second homes as holiday homes they may be comparable'a. If however the second homes are being bought for commuting, renting, speculative investment or for family members the two homes may not be very close substitutes. It is no good buying a house in Australia rather than a London suburb if you are living in your second home for the weekend for example.

This means there is likely to be a relationship between the price and demand in each market. The extent to which this argument is valid depends upon the closeness of the substitutes. Some may argue the goods are close substitutes, if for example people are buying the second homes as holiday homes they may be comparable'a. If however the second homes are being bought for commuting, renting, speculative investment or for family members the two homes may not be very close substitutes. It is no good buying a house in Australia rather than a London suburb if you are living in your second home for the weekend for example.