Housing demand and supply
Real estate is a tangible asset made up of property and the land on which it
sits. Like other assets, real estate is also subject to supply and demand.
The prices of homes, like stocks and bonds, depend heavily on the law of
supply and demand.
Key Takeaways
The housing market relies very heavily on supply and demand.
Housing demand and low supplies normally cause prices to rise.
Prices drop when there is low demand and a larger supply of homes
on the market.
Low interest rates generally impact demand, while natural disasters,
changing lifestyles, and the lack of available lots affect supplies.
Supply and Demand
The theory of supply and demand is one of the most basic principles in
economics.
The law of supply and demand is a basic economic principle that explains the
relationship between supply and demand for a good or service, and how their
interaction affects the price of that good or service.
When there is high demand for a good or service, its price rises. If there is a
large supply of a good or service but not enough demand for it, the price falls.
Factors affecting supply and demand of housing
A look at factors affecting the demand and supply of housing.
Demand-side factors
1. Affordability. Rising incomes mean that people are able to afford to spend
more on housing. During periods of economic growth, demand for houses
tends to rise.
2. Confidence
Demand for houses depends on consumer confidence. In particular, it depends
on people’s confidence about the future of the economy and housing market.
If people expect prices to rise, demand will rise so people can gain from rising
wealth.
3. Interest Rates
Interest rates play a big factor in determining the cost of mortgage interest
repayments.
4. Population
A very important factor. Faster population increase, has led to increasing
demand for houses.
5. Mortgage availability
Another factor that determines the effective demand for houses is the
willingness of banks to lend mortgages. If banks give mortgages with bigger
income multiples, then the effective demand for houses is greater.
Many mortgage products have been withdrawn, making it more difficult for
would-be homeowners to get on the property ladder.
6. Economic growth and real incomes. Rising incomes enable people to afford
bigger mortgages and encourages demand for housing. In boom times,
demand for housing grows rapidly suggesting demand for houses.
7. Cost of renting.
If the cost of renting rises, then households will make greater efforts to try and
buy a house as buying a house through mortgage becomes relatively cheaper.