factors-that-affect-supply-and-demand-in-housing.pdf

FACTORS THAT AFFECT SUPPLY AND DEMAND IN HOUSING The Law of Supply and Demand 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 that interaction affects the price of that good or service. When the...

FACTORS THAT AFFECT SUPPLY AND DEMAND IN HOUSING The Law of Supply and Demand 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 that interaction affects the price of that good or service. When there is a 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. The reason is that people will bid up the prices when there is relative scarcity, and there will be unsold items when there is an oversupply. The theory of supply and demand is one of the most basic principles in economics. Supply and demand work against each other until the point at which the equilibrium price is achieved—that is the price where supply is equal to demand in the market. That happens, of course, when all other factors remain equal. Demand The law of demand dictates that people will have lower and lower demand for a good as its price rises ever higher. Similarly, lower prices drive demand, meaning consumers value and purchase something more when it's cheaper. Supply The law of supply says that a higher price will induce producers to supply a higher quantity to the market. Likewise, when supply is low, prices will rise as people will scramble to buy up scarce resources.  Real Estate Supply and Demand The housing market, too, relies heavily on supply and demand, which is why it is a much looked-at indicator in the industry. Each housing transaction, of course, involves a buyer and a seller. 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. FACTORS THAT AFFECT SUPPLY AND DEMAND IN HOUSING Demand Factors 1. Affordability. Rising income means that people can afford to spend more on housing. During periods of economic growth, demand for houses tends to rise. Also, demand for housing tends to be a luxury good. So, a rise in income. This graph shows that house prices (and therefore demand for housing can rise much faster than earnings, suggesting there are many other factors influencing demand – at least in the short run. AFFORDABLE HOUSING: Despite the frenetic pace of construction and transactions, the country still suffers from a chronic shortage of affordable housing. The government estimates that the housing shortfall will reach 5.8m in 2016. In metropolitan Manila alone, the current backlog is estimated at just below 500,000 units. “There is new building technology that facilitates socialized housing, but it needs to prove it can last for up to 30 years, which is the tenure of the housing loan, especially in an environment that is susceptible to climatological events,” Darlene Marie Berberabe, the president and CEO of the Pag-IBIG Fund, told OBG. Private developers have been reluctant to enter into affordable housing projects, as commercial returns on lower margins are harder to come by without achieving significant scale. The government has therefore introduced some value-added tax exemptions that developers participating in socialised housing schemes can take advantage of. Private developers are also mandated to ensure that 20% of their total project cost or their total land area for urban schemes is allocated to socialised housing. There are several ways to comply, depending on the location of the project, or whether the developer prefers to acquire existent socialised housing assets instead of building additional units. “The industry is producing less than 200,000 units of affordable housing per year, at a level that is covering only incremental demand but not addressing the backlog. To be successful in this space you need to come up with a model that works for delivering low-cost housing,” Guillermo Choa, the chairman of property developer Pro-Friends, told OBG.  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. In a boom, demand for houses rises faster than incomes as seen in the graph above. Increased purchasing power in an environment of growing consumer confidence is motivating domestic and global retailers to expand, boosting demand for retail space. In addition, the hotel property segment is benefitting from increasing numbers of international business visitors to the capital and leisure travellers to resort-oriented islands, while rising manufacturing output, trade flows and demand for logistics are driving occupancy levels in industrial lots. 3. Interest Rates Interest rates play a big factor in determining the cost of mortgage interest repayments. 4.Population A very important factor. It is not just the number of people but demographic changes. e.g. growing number of single people living alone has led to increasing demand for houses. The demand for housing doesn’t just depend on the population but also the average size of a household. Certain social and demographic factors are causing a rise in the number of households (faster than the population increase). 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. 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. The willingness of banks to lend mortgage finance can vary depending on the strength of the interbank lending sector. The Credit crisis of 2008, has seen a sharp rise in the cost of interbank lending and a fall in availability of mortgage finance. Many mortgage products have been withdrawn, making it more difficult for would-be homeowners to get on the property ladder. For example, mortgages such as 125% and 100% mortgages have been withdrawn. Banks are increasingly demanding a higher deposit before lending mortgages. MASS MARKET: The Philippines is experiencing a rush of first-time buyers as mortgage rates have hovered around record lows, and a growing middle class – underpinned by the new wave of BPO employees – is driving demand for mid- market housing. Although many fresh graduates entering the profession opt to initially live at home, after a few years of saving they are able to move into smaller condominium units classified by Colliers as studio or one-bedroom, ranging from 21 sq metres to 60 sq metres. Those with younger families transitioning up the property ladder tend to opt for subdivisions or townhouses in areas outside Manila’s three main CBDs. It is estimated that around 10% of all Filipinos are employed abroad as OFWs. The central bank estimates that 2014 remittances expanded by a further 5% to reach a record $23bn for the year. A substantial proportion of this money – up to 60%, according to figures from the World Bank – goes towards supporting family members to purchase 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 is income-elastic 6. Cost 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. Philippines: Price/rent ratio This ratio is typically used for measuring undervaluation/overval uation of real estate prices, calculated by dividing the gross rental yield by 100 so Below is the 2016-2030 estimated regional breakdown of housing demand in units: Based on this table, the demand for economic housing is almost equivalent to the demand for socialized housing and the cannot afford segment combined. Excluding the demand for the cannot-afford segment, the housing industry needs to produce an average of 305,412 units per year in order to address the housing demand up to 2030. Supply factors Factors affecting supply Those more interested in broader urban dynamics tend to think of housing supply as the total stock of units in an urban area, with demand being the total number of households in the area. Research on housing supply has grown owing to improved data combined with heightened interest in policies such as local land use regulations. Heterogeneity in supply conditions across markets is shown to be essential to understanding the growing price dispersion across metropolitan areas, as well as to understanding whether positive growth shocks to a metropolitan area manifest themselves more in terms of expanding population and homebuilding or in terms of higher wages and house prices. The nature of supply obviously also influences local housing- market dynamics. Recent research has shown that differences in the elasticity of housing supply can account for the wide variation in new construction volatility (but not price volatility) across markets over time. The extraordinary nature of the recent boom only increases the need to understand how housing-market fundamentals and supply and demand affect the functioning of this huge asset market. In the absence of market segmentation of residential construction statistics and License to Sell Statistics (for the low-cost to high- end segments), the reported residential units under PD 957 are allocated as follows: 30% for low-cost housing 30% for high-end housing 40% for mid-end housing. This assumption was based on the number of registered residential units with the BOI from 2003 to 2010 which was at 34%. In summary: References: https://www.investopedia.com/ask/answers/040215/how-does-law- supply-a nd-demand-affect-housing-market.asp https://oxfordbusinessgroup.com/overview/home-comforts-matching- supply -demand https://www.economicshelp.org/blog/15390/housing/factors-affecting- suppl y-and-demand-of-housing/ https://psa.gov.ph/sites/default/files/6.6.3%20Statistics%20for%20Hou sing% 20Policy.pdf https://www.annualreviews.org/doi/full/10.1146/annurev.economics. 05070 8.142907#_i14