Factors That Affect the Supply and Demand of Housing
Understanding the factors that drive the supply and demand in real estate is crucial for real estate investors. Like all types of tangible assets, real estate is subject to changes in the relationships between supply and demand. In residential real estate, demand is measured by the number of people who want to buy homes, while supply refers to the number of houses available. Generally, when demand for housing is high but the supply is low prices tend to increase. Conversely, when the demand is low and supply inventory is high, prices will fall.
One of the factors that influence real estate demand is the current interest rate. All things equal, the higher the interest rate, the lower the demand for real estate. High-interest rates mean that the cost of borrowing is higher, and home buyers may be unable to borrow enough through mortgage and, consequently, may put off purchasing a home. Conversely, if the interest rates are low, more home buyers can afford to borrow enough to make a home purchase.
The overall economy also plays a vital role in the demand for real estate. In a bull market, prices increase steadily, employment levels are high, and investors are optimistic about the stock market. In this scenario, people are more confident about buying a home. On the other hand, if the economy is down and the job market is struggling, people are less secure about their finances and less likely to buy a house.
When buying a home, people look at the affordability of properties in their desired cities or towns compared to their income. If the prices are high relative to income, demand tends to be lower. However, when people have higher incomes than the home prices, demand may pick up. The affordability of renting is also a factor in measuring the demand for real estate. If renting is cheaper than owning a home, many people will choose to maintain their lease instead of buying a house.
Immigration can also affect the demand for real estate in a particular city or town. With a high proportion of immigrants, cities face higher demand for real estate and infrastructure. In more expensive cities, immigrants can add significantly to the renter demand pool.
In terms of supply, the number of active listings directly correlates to the supply of homes for home buyers to choose from. When there are more properties in the market than there are buyers, houses are likely to sell for a lower price or not at all. However, fewer active listings and stronger real estate demand can create a bidding war among buyers, with homes selling for more than their listed prices.
Land use is one of the determining factors of building residential or commercial properties. It specifies the height of the buildings, density, and the types of properties (e.g. house, townhouse, or condo) that will be constructed. If the land use is not enough to meet the demand for new homes in a neighborhood, it could lead to a shortage of homes and increased prices. For example, more people prefer single-family homes to townhouses or condos in suburban areas. If the land use only allows townhouses or condos, the prices of existing single-family homes may increase.
Getting permits for new home construction also influences the housing supply. If there is significant government red tape prolonging the time to build new homes in certain communities, home prices of existing homes could also increase due to a shrinking housing inventory.