The theory of supply and demand is one of the most basic principles of economics. Supply and demand interact until an equilibrium price is reached, that is, until supply is equal to market demand. Of course, that happens when all other factors remain the same.
The housing market is also highly valued in the industry as it is highly dependent on supply and demand. Of course, every home transaction involves buyers and sellers. The buyer offers to buy the property and leaves the seller to accept or reject the offer.
The forces of supply and demand interact with each other until the equilibrium price of real estate is reached. The law of supply and demand determines the equilibrium price of real estate. Low housing supplies and inventories can lead to higher prices and tender wars. Certain properties are in demand from multiple parties, all of which may be trying to outperform each other by raising the asking price. The bid war ends when the seller accepts one of the offers. This also removes one unit from the available supply. Home prices tend to rise when real estate demand is high in a particular city or state and quality real estate is not available.
On the other hand, housing prices tend to fall when there is little or no housing demand due to the economic downturn and oversupply.
4 Factors that Influence Supply
Active Listings
More active offers in the market mean more homes to choose from for homebuyers. However, if you lack active offers, you will have fewer homes to choose from.
New Homes
If the supply and demand of real estate do not match, a new home will help fill the gap. With a shortage of available land and government bureaucracy in the way, newly built homes are simply not enough to keep up with demand, which can result in higher real estate prices.
Permits
If there is a lot of bureaucracy and it takes time to bring a new home or building to market, the supply of apartments tends to be low and home prices tend to be high. However, streamlining the process of obtaining permits by the government tends to increase housing options and, as a result, lower prices. Keep in mind that increasing permits does not necessarily mean more homes. The new housing project must still be financially viable for the builder to continue. If home prices fall too low or interest rates rise, developers may decide not to proceed with the project, even with permission.
Land Use
Land use determines whether you may construct residential or industrial homes there. It additionally stipulates density, the peak of the homes and the varieties of homes – consisting of homes, townhouses, or condos.
If there`s a mismatch among the land use and the call for brand new houses, it can result in a scarcity of houses and a boom in domestic expenses. For example, if anyone desires to stay in an indifferent residence with a backyard in a sure area, however the land use handiest permits for condos, it can result in better domestic expenses for the few indifferent homes which can be there.
5 Factors that Influence Demand
Interest Rates
Low interest rates mean that the cost of borrowing is lower, and homebuyers can afford to borrow more by way of a mortgage and, consequently, can spend more on a home. The reverse also holds true; high interest rates mean that the cost of borrowing is higher, and homebuyers can afford to borrow less in a mortgage and, therefore, can spend less on a home.
The Economy
When the economy is good, the demand for real estate tends to be high. If the employment market is good, the demand for real estate tends to increase. If the employment market is devastated, you`re unemployed, or you’re not sure if your job is safe, you probably don’t need to rush to buy a home. You may still be working during a recession, but you can be fired at any time and worry that you probably don’t want to buy a new home.
Affordability
Affordability is another factor to consider. It plays a role in both real estate demand and home prices in both markets. Affordability of rent also affects real estate demand. For example, Toronto has a low average total income, but home prices are the second highest in the country. Ottawa, on the other hand, has a higher median income and lower overall home prices than Toronto. It plays a role in both real estate demand and home prices in both markets. Affordability of rent also affects real estate demand. If renting is much cheaper than owning a house, people can choose to rent instead of owning it.
Immigrants
The more immigrants there are in a particular city, the higher the demand for real estate. As an example, the Greater Toronto Area sees about 100,000 new immigrants each year, driving demand for real estate and leading to higher home prices. Foreign buyers also influence real estate demand. They may not plan to live in Canada, but buying real estate here means higher demand for real estate and less supply.
Mortgage Qualifications
Mortgage stress testing also affected housing demand. When buying a home, you must qualify for the higher of the mortgage interest plus 2% or the Bank of Canada’s five-year benchmark interest rate (currently 5. 19%). Homebuyers who could afford to buy a home before the stress test can now choose to be on the sidelines because they can’t afford to buy a home under the new rules.
As you can see, there are several factors that influence the supply and demand of housing, each of which plays an important role. We don’t know how much each factor contributes to the rise in home prices, but it’s almost certain that each will play a role in some way.
