"Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world." – Franklin D. Roosevelt
Home ownership is something many people dream of. However, it is challenging due to ever rising property prices. Did you know that these prices are heavily affected by economics? Let’s understand that better by exploring the concepts of affordability, supply and demand.
Affordability
The affordability of housing can be calculated using the Housing Affordability Index. The index measures whether a potential homeowner can afford to take out a 30-year fixed mortgage to purchase a single-family home in a metropolitan area. The index uses a base level of 100, with higher numbers indicating higher affordability and lower numbers indicating lower affordability. Houses are considered affordable if median prices are no more than three times median salaries (Diongson, 2023). Read more here.
According to Knight Frank, the affordable housing gap (difference between house prices and income) across the world has reached 740 billion USD. Reasons behind this include rising mortgage interest rates, rapid urbanization and housing developers hoping to generate more revenue (West London Business, 2019). With more people moving to the city in search of job opportunities, housing has also become scarce, leading to the concept of supply.
Supply
A low supply of housing inventory drives prices up. The supply of housing can be affected by the costs of production, as well as the geographical location of the area. The higher the cost of production, the fewer houses are built, reducing the supply of houses coming to the market. Costs include labour costs, land for development and building materials (Mitchell, 2020). Simply having more hills and less flat ground to build homes can also decrease supply. This is an issue in smaller yet densely populated financial hub cities, such as Hong Kong, where demand for housing is high due to many seeking work there. However, supply is low due to only 25% of land being flat and developed.
Demand
Housing demand can be influenced by lower interest rates and borrowing costs. When interest rates are low, people are willing to take on more debt because they can pay less interest when borrowing for the same monthly outlay. On the other hand, a weak economy can discourage people from purchasing homes, decreasing housing demand (Mansa, 2023).
The three concepts of affordability, supply and demand are interconnected. When the demand for housing is high, but supply is low, home prices often rise, which decreases affordability. When there is a glut of housing available in a market, homeowners may lower their prices due to less demand in the market, thus affordability increases. All in all, the economics of housing affects many areas of our daily lives, therefore it is important to stay informed in order to make suitable decisions.
Reference List
Diongson, D. (2023). What Is the Housing Affordability Index? Definition & Limitations. [online] TheStreet. Available at: https://www.thestreet.com/dictionary/housing-affordability-index#:~:text=sales%20and%20construction.-,How%20Is%20the%20Housing%20Affordability%20Index%20Calculated%3F,median%20income%20and%20qualifying%20income. [Accessed 24 Jul. 2024].
Mansa, J. (2023). How does Supply and Demand Affect the Housing Market? [online] Investopedia. Available at: https://www.investopedia.com/ask/answers/040215/how-does-law-supply-and-demand-affect-housing-market.asp#:~:text=The%20housing%20market%20is%20a,less%20demand%20in%20the%20market. [Accessed 24 Jul. 2024].
Mitchell, C. (2020). Supply and demand: the housing market – The Sloman Economics News Site. [online] Pearson. Available at: https://pearsonblog.campaignserver.co.uk/supply-and-demand-the-housing-market/#:~:text=Factors%20affecting%20the%20supply%20for,for%20development%20and%20building%20materials. [Accessed 24 Jul. 2024].
West London Business. (2019). Knight Frank estimates affordable housing gap across the world has reached $740 billion. [online] Available at: https://westlondon.com/knight-frank-estimates-affordable-housing-gap-across-the-world-has-reached-740-billion/ [Accessed 24 Jul. 2024].
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