The real estate market heavily relies on supply and demand, much like every other market. Understanding supply and demand can better help you in your real estate investment venture. Real estate supply and demand influence property prices and availability. We take a deeper look into these factors to better help you understand the market dynamics.
The Basics of Supply and Demand in Real Estate
Supply is a specific amount of goods or services available for consumers to purchase. In the real estate market, supply would be the available properties for sale or lease at a point in time. Residential, commercial, and industrial properties are all affected.
Demand is a “consumer’s desire or willingness to purchase a specific good or service at a specific price.” In real estate, demand is the ability buyers have to purchase or rent a property.
The interaction between supply and demand determines property prices and availability.
How Supply Affects the Real Estate Market
Supply affects the real estate market in several ways. New construction, existing inventory, government policies, and natural disasters all affect supply.
- New Construction is a main factor influencing supply. When new construction happens, supply increases. This happens when developers construct new apartments, homes, and commercial properties.
- Existing homes for sale can also affect supply. In times of economic stability, more homeowners may sell, increasing the supply.
- Government policies such as zoning laws, building regulations and land use also affect supply. Restrictions on land development and harsh building codes slow the number of new properties entering the market.
- Natural disasters and climate change including floods, hurricanes, tornados, or wildfires can reduce the supply greatly. Two things happen, a loss of property to the disaster, and not building in vulnerable areas.
How Demand Influences the Real Estate Market
- Economic conditions are major indicators of market demand. If the economy is strong, morale is strong, employment rates are high, and consumer confidence increases. This confidence leads to a greater demand for property. Through a recession, the demand for new homes decreases.
- High interest rates discourage buyers’ ability to afford homes. Low interest rates directly affect the cost of a mortgage, making homeownership easier, and increasing demand. When interest rates are high, the complete opposite happens. The cost of a mortgage increases and not as many people can afford ownership.
- Population growth is typically a good indicator of market growth. When the population increases, the demand for housing also increases. Growth happens faster in urban communities where job opportunities and amenities attract more people.
- Lifestyle changes can also affect demand. Now more people are working remotely than ever, so the type of housing demand changes. For instance, more people may be seeking homes with office spaces in suburban areas away from the crowded city.
- Government incentives help to increase demand. Tax breaks, subsidies, or first-time buyer programs can help grow demand making purchasing more attractive.
The Interaction Between Supply and Demand
A balance between supply and demand is the market equilibrium. This is when supply and demand balance each other out and the market becomes more stable.
A buyer’s market happens when supply exceeds demand. At this time more properties are typically available than buyers. Lower property prices and more negotiating power is available for buyers.
A seller’s market happens when demand exceeds supply. A signature of this market is more available buyers than available properties for sale. This then drives up prices giving the seller the upper hand.
Understanding how supply and demand work together will guide you in making informed decisions. Look for opportunities in markets where demand is growing. Policymakers can also intervene with extreme imbalances to promote stability.
Factors Influencing Supply and Demand Dynamics
Many factors influence supply and demand. External economic factors, demographics, technological advancements, government and policy influences to name some.
External Economic Factors
- Employment trends have a direct influence on the housing market. Areas with growing job markets see increased demand for housing.
- The cost of inflation can decrease the buying power of many, this includes the demand for real estate.
- Global events, such as the recent COVID-19 pandemic can wreak havoc on supply and demand. The pandemic led to a temporary halt to many work environments, including the construction industry. This shift also altered housing preferences away from urban areas and more to suburban areas, thus changing demand.
Demographic Trends
- An aging population also changes the dynamics of demand. Specific housing communities, such as retirement or smaller, with more accessible homes will increase.
- Migration patterns of people also change demand. As more domestic and international migration continues, this will impact local real estate markets. For example, cities with an influx of new people will see a higher housing demand.
Technological Advancements
- New technology in construction reduces building cost and time to construct new homes. This in turn increases supply.
- Property technology, otherwise known as PropTech allows for advancements in the housing market. Virtual tours and online marketplaces make it easier for buyers to find and purchase properties.
Government and Policy Influence
- Property taxes, capital gains taxes, and other tax policies can influence both supply and demand. High property taxes may deter buyers, while more favorable tax conditions attract buyers.
- Government subsidies for affordable housing can increase supply. This helps make it financially viable for developers to build low-cost homes.
- Central banks control the national interest rates and influence mortgage rates directly. Lowering interest rates increase demand while higher interest rates decrease demand.
Making informed real estate investment decisions relies on the understanding of supply and demand. Many factors influence supply and demand, including economic conditions, government policies, demographic trends, and technological advancements.
