Supply and demand in real estate

Nov 2, 2010

extracted : starproperty.com

You may have heard that the real estate market is cyclical, that it rises and falls as years go by.

Supply and demand in the real estate industry can be defined by factors that are said to determine price ? the property the owner hopes to sell at a certain price (supply), and the amount the buyer is willing to pay for it (demand).

The Supply Curve/Line represents the relationship between the market price and the total number of properties available.

The responsiveness of the quantity supplied to changes in price is called the price elasticity of supply. Supply is relatively inelastic in the short-term and more elastic in the long-term.

The Demand Curve/Line represents the relationship between market price and total quantity purchased.

It is noted that besides price, demand is also affected by other variables such as market trend, economics, location and others. There can be an upward shift in the demand curve due to factors such as higher income levels, higher purchasing power, higher aspirations and desire for a better quality of life.

Because of the characteristics of real estate, the demand for property is relatively less elastic than those of other goods.

Compared to manufactured commodities, supply and demand in real estate isn’t as easy to balance.

The process of building and developing properties takes time. There is also problem of density in certain areas.

Some locations are already highly dense, with scarce land. You cannot move the properties to where the buyers are.

Shortage of supply cannot be resolved by manufacturing more land. Each parcel is unique and finite and cannot be added to match the demand.

Though you might be able to create more condominiums in a given space, the space itself is unique and cannot grow to accommodate short supply.

 Buyers

Location plays a vital role in purchasing properties. A good awareness of the local real estate market condition can assist buyers in making their choices.If there is a high demand for properties in certain areas with limited units, the price will escalate. In reverse, if the supply far outweighs demand, the price of the property will decline due to high availability. For example, the prices of properties in KLCC have soared in the last few years due to increase demand, from both the locals and foreign investors.

Sellers

Even though purchasing a property in an area with high supply and low demand will be advantageous to the buyer, selling a property during the same condition will have an adverse effect. There is a likelihood that they will balance each other out. Although purchasing a home during a time when there is high supply but low demand is always beneficial for a homebuyer, selling a home during those same conditions is difficult.

Be in the know Homebuyers and investors must keep abreast on what is happening to the local market. There are many factors that can have a huge impact at certain areas and yet have virtually no or little predicament on other areas. Pay careful attention to the factors that influence your local market.

If you’re in a market with many industrial areas and businesses, monitor the businesses and industries carefully, as growth or downsizing will affect the area.