Factors Underlie The Demand For Housing

FACTORS UNDERLIE
THE DEMAND FOR

HOUSING?
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 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.
FACTORS AFFECTING SUPPLY
AND DEMAND OF HOUSING
Demand-side factors
The demand for housing is the quantity of
properties homebuyers are willing and able to
buy at a given price in a given time period
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. Also,
demand for housing tends to be a luxury good. So a
rise in income causes a bigger % rise in demand.
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
3. 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.
4. Interest Rates
Interest rates play a big factor in determining the cost of mortgage interest
repayments. A rise of mortgage interest rates increases the cost of housing
increases.
5. 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
A rise in mortgage interest rates increases the cost of financing the loan
6. Mortgage availability of the purchase of a property.
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 people wanting to buy their own home , the main alternative is to
rent – so a higher cost of renting properties could lead to an increased
7. Cost of renting. demand for owner occupied home.
This shows a 30% increase in the cost of renting between 2005 and
2021 – despite the financial crisis and housing ‘crash’. In London
the rise in rents was higher up until 2017. – this helped to cause
UK house prices to continue rising after 2011.
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.
Supply -side factors
Housing supply is the flow of properties available at a
given price in a given time period. Supply will mix of new
and older housing
The main conditions of supply in the housing market are:
1. Cost of production for construction companies

2. Number of construction companies and their objectives
3. Amount of innovation achieved in the house- building
industry
4. Extent to which property builders achieve economies of
scale
5. Government taxation and subsidy of new housing
developments
6. government spending on a building of new social
housing

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FACTORS UNDERLIE

THE DEMAND FOR

When there is a high demand for a good or

The housing market, too, relies heavily on

Rising incomes mean that people are able to afford to

Demand for houses depends on consumer confidence.

•Increased life expectancy, leading to more single old people

The main conditions of supply in the housing market are:

1. Cost of production for construction companies

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