Discuss the extent to which demand side factors as well as supply side factors are likely to influence house prices. Lauren Gurnaud Student Number: 3500136 MSc Real Estate – Real Estate Economics and Finance Module Contents Page 1. 1 Introduction 1. Introduction The housing market affects both consumers and economic stability, as it is a key component to the economy. Barrell, Kirby and Whitworth identified that UK house prices have a strong cyclical pattern (2012). As you can notice on the graph below, the real house price line reiterates the point above. The trend is displayed by an upward curve meaning that prices have been seen to have an overall increase over …show more content…
2. Demand Demand in the property sector can be defined as the quantity of space or number of units demanded at various prices (Jowsey E., 2011). The fundamental principle of demand can be identified in the figure below: (Jowsey E., 2011) The figure above indicates that demand tends to decline with price. In other terms, higher prices will be noticed when smaller numbers of units or space are on the market. As Jowsey (2011) said “an important trait of the demand curve is the sensitivity of quantity demanded to price changes”. As we have established the demand aspect, we need to now look at the quantity/supply side. 3. Supply Supply is usually referred to as a schedule that reports the quantity of housing units or commercial space supplied at different prices (Jowsey E., 2011). There are 3 supply concepts that need to be considered in the property market: the short-run aggregate supply, the long-run aggregate supply and the new construction. The figure below illustrates these: (Adapted from Jowsey E., 2011) Put all the graphs together 4. Equilibrium Demand and supply curves relate price to quantity. In a perfect market, demand and supply would meet at an equilibrium point. The diagram below illustrate the equilibrium concept, the point where both curves meet meaning that at this point in time, demand and supply are equal. Find a Graph to show equilibrium As it will be seen in the next section of this essay, changing an underlying factor may
The equilibrium price is obtained by putting the demand curve and the supply curve lines and plotting when it connects (Sextion,2013).
Another interesting perspective on the impact inflation has on the housing market is given by the distorted decisions that customers make under the influence of inflation (Hellerstein, 1997). A potential negative correlation could be perceived whereby perceived higher rates of inflation would lead to purchases of houses that would boost the housing markets.
There are several factors that can influence the housing industry economically. Supply and demand coupled with price elasticity can affect the housing industry. Negative and positive externalities, wage inequality, and the monetary and fiscal policies can all have substantial affect the industry of new homes. It must also be determined exactly how the economy affects the industry in both positive and negative ways.
America’s 2008 recession brought on “falling home prices and tight credit; state- and local-government cuts; higher oil prices that stood in the way of economic growth (“Back from the,” 2012). The price of homes dropped significantly pushing the equilibrium price down resulting in a shortage and an increased demand for houses at lower rates. When this occurs, suppliers are motivated to start producing fewer homes until a new market equilibrium price and quantity are achieved. After America’s recovery in 2009, suppliers slowly began to produce more homes and since that time, house prices have gradually increased (“Back from the,” 2012).
Demand refers to the quantity of products people are willing and able to purchase during some specific time period, all other relevant factors being held constant. Price and quantity demanded stand in a negative (inverse) relationship: as price rises, consumers buy fewer units; and as price falls, consumers buy more units (Stone 75).
Macroeconomics is an excellent tool for the analysis of the housing industry as something like a capital good, as a home is considered to be, cannot easily be studied in a short-term platform. Real estate is a good that costs several times more than an average persons annual income, in the United States that number is typically 7 times as much, and in the United Kingdom that number is 14 times as much. Several factors of both supply and demand directly impact the housing market on a macroeconomic scale. (Business Economics, 1)
The market price of a good is determined by both the supply and demand for it. In the world today supply and demand is perhaps one of the most fundamental principles that exists for economics and the backbone of a market economy. Supply is represented by how much the market can offer. The quantity supplied refers to the amount of a certain good that producers are willing to supply for a certain demand price. What determines this interconnection is how much of a good or service is supplied to the market or otherwise known as the supply relationship or supply schedule which is graphically represented by the supply curve. In demand the schedule is depicted graphically as the demand curve which represents the
According to Loungani, (2010) “Robert Shiller is well known for predicting the U.S. stock market crash of 2000–01. In 2003, he warned that U.S. house prices too contained a “bubble”; that is, they had risen far beyond what was warranted by fundamental driving forces such as income growth, interest rates, demographic change, and building costs.” (pg. 16) This is a clear example of how macroeconomic volatility affects the housing industry as well as other industries that feed off of the housing industry such as construction.
Housing demand includes household growth, real incomes, real wealth, tax concessions to both owner-occupied and rental housing, concessions to first homebuyers, returns on alternative investments, cost and availability of finance for housing and the institutional structure affecting housing finance provision (Yates, 2008). The growth in the number of households and in real income results in the increased pressure on housing demand.
Understanding the fundamental concepts of economics allows us to analyze laws that have a direct bearing on the economy. These laws and theories are essentially the backbone of how economics is used and studied. The law of demand can be expressed by stating that as long as all other factors remain constant, as prices rise, the quantity of demand for that product falls. Conversely, as the price falls, the quantity of demand for that product rises (Colander, 2006, p 91). Price is the tool used that controls how much consumers want based on how much they demand. At any given price a certain quantity of a product is demanded by consumers. As the price decreases, the quantity of the products demanded will increase. This indicates that more individuals demand the good or service as the price is lowered. This can be illustrated using the demand curve. The demand curve is a downward sloping line that illustrates the inversely related relationship of price and quantity demanded.
This graph shows that the % change in demand is greater than the % change in price. This is shown by the downwards movement in the demand curve. The higher price P2 shows less is being demanded Q2 the lower price P3 shows an increase in the quantity demanded Q3.
Interest rates have a major economic impact on the real estate market. Interest rates directly affect property sales. Residential property realizes the greatest affect as interest rates have a considerable influence on a homebuyer’s capability to purchase a new property. The customer is affected when there are significant increases or decreases in interest rates. Declining interest rates lower the costs of obtaining a mortgage; this in turn creates higher demand for homes, and pushes home prices up. Conversely, high interest rates increase the costs to obtain a mortgage; these increases lower the demand for homes, which creates a decline in home prices. (Stammers, 2016)
The demand curve shows what happens to the quantity demanded of a good when its price varies, holding constant all the other variables that influence buyers. When one or more of these other variables changes, the demand curve shifts leading to an increase or decrease in demand. The table below lists all the variables that influence how much consumers choose to buy cigarettes.4
In this report, the question “How much of the changes in the median selling price of homes in a city can be explained by the changes in median income of that city?” is answered. Home ownership is an important aspect of one’s life stages, and home prices are determined by demand and supply. The demand curve is affected by the one’s income, such that as one’s income increases, one is more willing to pay a higher price for the same quantity of goods (Baye & Prince, 2014). However, there are many other factors that might affect the demand curve, e.g. no. of children, in the household, the perceived quality of education in the school district, or the number of job positions (filled or open) around the city. According to Burda
Supply and demand is perhaps one of the most fundamental concepts of economics and it is the backbone of a market economy. Demand refers to how much (quantity) of a product or service is desired by buyers. The quantity demanded is the amount of a product people are willing to buy at a certain price; the relationship between price and quantity demanded is known as the demand relationship. Supply represents how much the market can offer. The quantity supplied refers to the amount of a certain good producers are willing to supply when receiving a certain price. The correlation between price and how much of a good or service is supplied to the market is known as the supply relationship. Price, therefore, is a reflection of supply and demand.