New homes are supplied by construction firms and demanded by families wishing to live in a new home. New homes are also bought by speculators who purchase houses in the hope that they can resell them for a higher price in the future.
Toolkit: Section Supply and demand A framework that explains and predicts the equilibrium price and equilibrium quantity of a good. A point on the market supply curve shows the quantity that suppliers are willing to sell for a given price.
A point on the market demand curve shows the quantity that demanders are willing to buy for a given price. The intersection of supply and demand determines the equilibrium price and quantity that will prevail in the market.
The toolkit contains a presentation of supply and demand that you can use for reference purposes in this and the following chapters. The supply-and-demand framework applies to the case that economists call a competitive market A market that satisfies two conditions: 1 there are many buyers and sellers, and 2 the goods the sellers produce are perfect substitutes. A market is said to be competitive, or, more precisely, to exhibit perfect competition, under two conditions:. In a competitive market, buyers and sellers take the price as given; they think their actions have no effect on the price in the market.
The market demand for housing is shown in Figure 4. We call this the market demand curve The number of units of a good or a service demanded at each price. In macroeconomics, we typically look at markets at this level of aggregation and do not worry much about the individual decisions that underlie curves such as this one.
As the price of housing decreases, the quantity demanded increases. This is an example of the law of demand, which derives from two effects:. In the case of the market for housing, the first of these is more important.
Most people own either zero houses or one house. As houses become cheaper, more people decide that they can afford a house, so the quantity demanded increases.
A few people might decide to buy an additional house, but they would presumably be in the rich minority. For other goods, such as chocolate bars or shoeshines, the second effect is more important: as price decreases, people increase the quantity that they buy. The buyer places an offer to buy a property, leaving the seller to accept or reject the offer. The forces of supply and demand work against one another until the point at which a property's equilibrium price is reached.
The law of supply and demand dictates the equilibrium price of a property. A low supply or housing inventory may drive prices up, which is what tends to result in bidding wars. A specific property may be in demand by multiple parties who all try to outbid each other by increasing their purchase price offer.
The bidding war ends when the seller accepts one of the offers, which then also removes a unit from the available supply. When there is a high demand for properties in a particular city or state combined with a lack of supply of quality properties, the prices of houses tend to rise. On the other hand, when a weak economy and an oversupply of properties leads to low or no demand for housing, the prices of houses tend to fall.
The precise values attributed to the supply and demand in a market is not an easy thing to measure in the real estate market. This is partly because it takes a long time to construct new homes or fix up old ones to put back onto the market. Similarly, real estate is not like other industries in that it takes a lot of time to buy and sell homes and other properties.
This means that transactions can take a long time to consummate, making real estate somewhat illiquid. Some of the factors that will influence housing demand include lower interest rates or borrowing costs. When interest rates are low, people are generally willing to take on more debt because they can afford relatively more debt for the same monthly outlay.
Put differently, they may be able to finance the purchase of a home because the amount of interest they have to pay is not as burdensome at low rates. As more buyers enter the market, the demand for housing increases in turn. And if there remains a limited supply of housing inventory, prices in a low interest rate environment may rise even more. Meanwhile, the supply of housing is in a constant state of flux. Inventory may increase when people are moving elsewhere—some may be downsizing, others may try to make more room for an expanding family, and still others may be purchasing their very first home.
Similarly, there may be an increase in development and new home construction, adding to the existing inventory. On the other hand, housing inventory sees decreases during times of natural disasters such as floods and earthquakes, or when existing properties are demolished. Land property is also a finite resource, so the amount of new developments is generally limited. One of the main causes of the Great Recession that followed the financial crisis in the mids was that the housing market crashed.
This was due to the law of supply and demand. During the lead-up to the financial crisis, consumers were enjoying relatively low borrowing rates. As with commodities traded on the market, housing prices continually fluctuate, sometimes with drastic changes over a short period of time.
Availability is a huge factor affecting prices within a set region, such as in a specific suburb of a metropolitan area. Likewise, demand for homes in that market also plays into that price, which is why two nearly identical homes in different cities may sell for vastly different prices. When buying a home in a seller's market, limit your contingencies and make your offer as favorable to the seller as possible. For houses and virtually anything else available for purchase, supply and demand play into the ultimate selling price.
When an item is in short supply and many people want it, prices tend to rise. When the market is flooded with an item or there's no demand for it, prices fall. Sporting event ticket prices tend to rise when a team reaches the championship level, yet tickets to the same team's events a few years later, when the team isn't doing well, cost far less.
Prices on holiday decor are another great example: At the peak of any holiday's shopping season, some shoppers are willing to pay a premium for the decor. Three days after the holiday, the leftover stock of these items is marked down to clearance prices due to little demand.
Housing supply and demand works in exactly the same way. Sometimes there are so many single-family homes available in the same region that there aren't enough buyers for all of them. 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 is income-elastic. In London the rise in rents was higher up until 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.
The UK housing market has been buoyed by expensive renting costs, which encourages buy to let lenders and encourages households to stretch their budget as much as possible to get on the housing ladder. Aside from the above, there is also something to be said about the effects of central bank policies that foster a shift from more secure and dependable assets such as bonds into less-dependable and riskier assets such as stocks and real estate.
Driven by a search for yield and higher returns, investor demand for housing whether by direct ownership, such as an individual purchasing a home to let or by a corporate mechanism such as a Real Estate Investment Trust that purchases a large number of homes to rent also influences supply, demand and pricing dynamics by keeping a portion of potential for-sale inventory off the market for an indeterminate period of time.
How about factors of demand in Low income housing controlling factors affecting supply of low income housing? A look at factors affecting the demand and supply of housing. In summary. Demand-side factors 1. Confidence Demand for houses depends on consumer confidence. Interest Rates Interest rates play a big factor in determining the cost of mortgage interest repayments. Population The population in England is forecast to grow to over 60 million in an increase of 6 million. The number of households forecast to rise from These demographic changes include issues such as: age of people leaving home Increased life expectancy, leading to more single old people Divorce rates, — increasing number of single-parent families.
Mortgage availability Another factor that determines the effective demand for houses is the willingness of banks to lend mortgages. Banks are increasingly demanding a higher deposit before lending mortgages.
In boom times, demand for housing grows rapidly suggesting demand for houses is income-elastic 7. Cost of renting. Factors affecting supply The number of new houses being built.
The graph above shows how the number of new houses built in Great Britain has varied over the past century. The peak was in the late s with over , built per year, Inthe late ss and early s that has fallen to , less than required Planning restrictions on the use of land.
A big issue in the UK is planning restrictions and limitations on building on green-belt land Local opposition to new home builds. There is widespread opposition to building new houses as local communities usually prefer to live in smaller villages without increased congestion. The profitability of building new houses. This is dependent on the demand for houses and prices.
In a boom, builders are usually keener to build more. Falling house prices can lead to a restriction in supply. See factors that affect supply Related Factors affecting the housing market. Thanks so helpful, but what about the factors which affect the supply of low income housing Reply. We use cookies on our website to collect relevant data to enhance your visit. Our partners, such as Google use cookies for ad personalization and measurement. However, you may visit "Cookie Settings" to provide a controlled consent.
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