Determinants of Demand and Supply

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  • Topic: Supply and demand, Real estate, Microeconomics
  • Pages : 3 (781 words )
  • Download(s) : 488
  • Published : July 6, 2007
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Sustained economic growth, low inflation and resultant low interest rates start to increase mortgage demand and put pressure on house prices. Comparing cities doesn't offer accurate postulating because price-to-income and price-to-rent ratios vary widely from city to city. An unexpected rise in real interest rates that raises housing costs, or a negative shock to a local economy, would lower housing demand, slowing the growth of house prices, and possibly even leading to a house price decline. When the market demand for properties in a particular area is high and when there is a shortage of good quality properties (i.e. supply is scarce) then the balance of power in the market shifts towards the seller. Conversely when demand both for new and older housing is weak and when there is a glut of properties available on the market, then the power switches to potential buyers. They have a much wider choice of housing available and they should be able to negotiate a price that is lower than the published price.

When the demand for houses in a particular area increases (perhaps because of an inflow of population into the area, or a rise in incomes following a fall in unemployment), there is upward pressure on market prices.

The main determinants of demand and supply are:
Determinants of demandDeterminants of supply
Price of the good / servicePrice of the good / service
IncomeCosts of producing the good / service
Price of substitutes / complementsObjectives of the firm
TastesProfitability of alternative products
Expectations of future price changesShocks

Determinants of demand for housesDeterminants of supply of houses PricePrice
Income / level of economic activityThe price of land
The level of rentsThe cost of building materials
Interest rates
Expectations of future price increases
The ratio of income to house prices

In looking at homes and comparing them from city to city, a single family home in Atlanta can start at 56K for a...
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