Price of Property vs Supply and Demand

Introduction

The price of a property is explained by the relationship between supply and demand for the property and how this interaction affects the price is the law of supply and demand. The relationship of supply and demand affects the housing market and the price of a house.The law of supply and demand states that when there is high demand for good quality property, then the price of property rises. When there are many properties available but not enough demand for them, the price decreases.

In the housing market, the law of supply and demand is an important factor. The transaction of property involves a willing buyer and a willing seller. The seller places an offer with the help of an estate agent and the buyer accepts or declines the offer. According to The Economic Times, the law of supply and demand dictates the equilibrium price of a property. When there is a high demand for properties in a particular city or state and a lack of supply of quality properties, the prices of houses tend to rise (The economic times).

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According to the economic times, when there is no demand for housing due to a weak economy and an oversupply of properties is available, the prices of houses tend to fall. The collapse of the real estate market causes a decrease in demand for properties, thus creating an oversupply of houses and decreasing properties prices.Supply and demandLaw of demandThe law of demand states that other factors being constant (cetris peribus), price and quantity demand of any property are inversely related to each other.

That means when the price of a property increases, the demand for it will decrease.

QUANTITY DEMAND

The above diagram shows a downward sloping demand curve. It indicates that when the price of property increases from price p3 to p2, then its quantity demand comes down from Q3 to Q2 and then to Q3 and vice versa.Law of supplyLaw of supply states that other factors remaining constant, price and quantity supplied of properties are directly related to each other. When the price paid by buyers for property rises, then suppliers increase the supply of the property in the market.

QUANTITY SUPPLIED

The above diagram is upward sloping supply curve that shows a positive relationship between the price and the quantity supplied. When the price of the property was at P3, suppliers were supplying Q3 quantity. As the price starts rising, the quantity supplied also starts rising.Equilibrium Equilibrium of a supply and demand curve is a point where the quantity supplied is equal to the quantity demanded. The result of the interaction between property buyers and property sellers in a competitive market determines supply and demand equilibrium, price and quantity of a property. Equilibrium point is also called the market price.Market forces tend to drop the price if the quantity supplied exceeds quantity demanded and prices rise if quantity demanded exceeds quantity supplied. This movement continues until there are no more changes, and quantity demanded equals quantity supplied. This result is market equilibrium

Equilibrium PRICE

QUANTITY

Factors that affect supply and demand in property marketAffordability: Demand for houses increases during the economic growth as a result of income raise, then people are able to spend more money on housing. Since property ownership tends to be a luxury good.

• Confidence: Demand for housing depends on people's confidence about the future of the economy and housing market. Interest Rates: If interest rates are high, the demand for property will fall because of the cost of mortgage interest repayments.
• Population: The demand for property depends on population and the average size of a household.
• Mortgage availability: The demand for houses is increased by the willingness of banks to lend mortgages. When banks give mortgages with bigger income multiples, then the effective demand for houses is greater. Economic growth and real incomes. Rising incomes enable people to afford bigger mortgages and encourages demand for housing. If economic growth increases, demand for housing grows rapidly suggesting demand for houses is income-elasticCost of renting: If the cost of renting rises, then households will make greater efforts to try and buy a housing as buying a house through mortgage becomes relatively cheaper.
• New houses: The number of new houses being built increases the supply in the property market.

Planning restrictions on the use of land decreases the supply in property as there are restrictions and limitations on building on green-belt landLocal opposition to new home builds. There is widespread opposition to building new houses as local communities usually prefer to live in smaller villages without increased congestion.

Profitability of building new houses

This is dependent on demand for houses and prices. In a boom, builders are usually keener to build more. Falling house prices can lead to a restriction in supplyConclusionLaw of demand explains consumer choice behaviour when the price changes. In the market, assuming other factors affecting demand being constant, when the price of a property rises, it leads to a fall in the demand of that good. This is the natural consumer choice behaviour. This happens because a consumer hesitates to spend more for the good with the fear of going out of cash.Law of supply depicts the producer behaviour at the time of changes in the prices of goods and services. When the price of a good rises, the supplier increases the supply in order to earn a profit because of higher prices.The market is in equilibrium when the quantity demanded is equal to the quantity supplied, that is, when the plans of the households (buyers, demanders) coincide with the plans of the firms (sellers, suppliers). The price at which this occurs is called the equilibrium price. At any other price there will be disequilibrium, in the form of excess supply or excess demand.

Reference

Supply, 2014 < law of supply and demand